Rethinking Value Creation in Private Equity

Applied anthropologist and C-suite talent & leadership advisor, Cher Murphy, partners with pure-play executive search firm ON Partners and co-president, Matt Mooney, to shed light on three imperatives to address the changing landscape of private equity’s human capital strategy.

May 28, 2024 – A recent Harvard Business Review article highlights private equity’s need for a talent strategy. While traditionally praised for their adeptness in driving value through financial engineering, the landscape of private equity has undergone a significant transformation: the focus on operational prowess is rising as the prominence of financial engineering diminishes, according to a recent report from ON PartnersMatt Mooney. “This shift in focus aligns with the sentiments echoed by PE executives, who emphasize that leadership effectiveness stands as the foremost lever for value creation,” he said. “It’s no secret that private equity firms are navigating through an era defined by disruption, uncertainty, and evolving value paradigms.”

Disruption, characterized by its multifaceted and unpredictable nature, poses formidable challenges, with 60 percent of business leaders finding it increasingly difficult to prioritize disruptive forces, according to a recent study by AlixPartners.

The rapid pace of change and disruptive influences compound the complexity of decision-making for PE investors and business leaders alike, according to the ON Partners’ report. “Decision-making in this complex landscape naturally amplifies the need for strategic alignment between business strategy and talent strategy,” it said. “Such alignment not only drives organizational success but also mitigates risks associated with leadership transitions and talent management.

While there’s optimism that exits will start to see a rebound in 2024, the slowdown has created a shift in focus toward value creation across existing portfolios. This year, GPs will take a more hands-on approach according to a new study by AlphaSense. As the conversation around leadership and talent management takes center stage in the evolving PE landscape, the question arises: How does PE address the need for a human capital strategy? ON Partners lays out three imperatives to operational leadership in an era of disruption.

1. Leadership is More Than Just the Individual.

At the heart of this discourse is a profound recognition: leadership is not merely the purview of individuals but an intricate interplay between organizational culture, strategy, and human dynamics.

“As an applied anthropologist, we study humans,” said Cher Murphy, applied anthropologist and C-suite talent & leadership advisor. “We study how humans interact, communicate, and evolve culturally.  Coming from that foundation, I’ve always looked at executive leadership as more than a few individuals driving strategy. Leadership is the intersection where organizations and individuals come together.”

Cher Murphy advises leaders on building organizational capability, increasing credibility, and leading effective, diverse teams during uncertainty with the quickening pace of change. She is an applied anthropologist, an executive coach, and a reticulist. As an advisor to executive teams and boards, Ms. Murphy has spent the last 20+ years advising teams in scaling portfolio companies for venture capital & private equity firms and driving transformations at Fortune 100 and FTSE 100 organizations. Her expertise includes coaching executives, team coaching, talent assessment and creating people strategies to drive growth and create stability. Having consulted for Nike, Amazon, McKinsey & Company, Ford Motor Company, Wells Fargo, Patagonia, McDonald’s, Chevron Phillips Chemical, Tory Burch and Microsoft, Ms. Murphy has partnered with large global organizations reaching an inflection point.

“We see that the leadership agenda from the top isn’t cascading down,” Ms. Murphy said. “The barrier is that leaders might create ideas and solutions from the executive team, but they’re not using all the resources of the team around them to solve in this current environment.”

Drawing from anthropological insights, Ms. Murphy emphasizes the need to widen the aperture of analysis, transcending the traditional focus on individual leaders to encompass the broader context of organizational design, communication, and culture change. And, evolving talent strategies and management isn’t solely on the HR leader, but the entire executive team.

ON Partners data indicates that CHRO tenure is declining across organizations year over year. The data illustrates that 25 percent of CHROs will stay in their role for one to two years and the average duration of CHRO tenure in 2023 was 2.5 years.

Related: The Imperative of Women in Private Equity

“We are in the age that the board has human capital metrics,” said Ms. Murphy. “If portco’s are aiming for 2024 IPO’s, the SEC has proposed a Human Capital Management Disclosure slated for throughout this spring.”

“The board and the executive team are more than just the compensation committee,” continues Ms. Murphy. “If you’re an executive team leader, you have data from people analytics on talent management and human capital to make sound data-driven decisions on leadership and talent.   You must answer these questions from multiple stakeholders because we’re in a stakeholder environment now.”

2. Agility and Talent Development are Not Opposing Forces.

“When you look at the economic cycle, it’s been up and to the right since 2009,” said Mr. Mooney. “So, you’re talking 14-15 years of free money, no interest rates. It has created half a generation of investors, board members, and leaders who have never seen market adversity. And many are not sure where to start.”

Matt Mooney, based in Atlanta, is co-president of ON Partners. He has more than 25 years of experience in executive search. Mr. Mooney has placed over 400 executives in C-level, general management, and board leadership positions across his consulting career. The sectors he has served include technology, consumer products and services, financial and professional services, and industrial. The organizations he has partnered with include public, private equity, venture capital and growth equity. Mr. Mooney has helped build over 25 executive leadership teams at public and high growth organizations.

Assessing talent strategically, not just during the hiring process but throughout their tenure, becomes crucial for private equity firms aiming to maximize the potential of their leadership teams. Ms. Murphy emphasizes the need for continued talent assessment and evolved talent development to unlock the full spectrum of capabilities within the organization.

“When you place the CEO, their job is innovating and driving success in the next three to five years in that organization,” Ms. Murphy said. “Their role is beyond the daily activities in that organization today. As a result, if you don’t have the right talent in the next levels aligned with the strategy and bringing complementary skills, you have a barrier to leadership. That’s why talent assessment and leadership development are key. It’s not just about assessing the talent when you choose new leaders, it’s about developing leaders as new skills and expertise will be needed for growth and surpassing unexpected challenges as a team.”

“However, the pace of change poses a significant challenge,” Ms. Murphy continued. “PE organizations will need to be highly adaptable and act quickly in fast-changing markets, especially in the areas of talent and leadership, Murphy points out, highlighting the inherent tension between agility and traditional leadership development.”

“What we need to be doing with a CEO and the executive team is helping them build the human capital strategy coming out of the business strategy before launching retained searches,” explains Ms. Murphy. “We look at what are the critical hires to meet OKRs, who is the critical talent to retain, what actions can organizations take now as we assess talent externally along with assessing existing talent internally.  Aligning the human capital strategy to the business strategy is often overlooked in portco’s.”

3. Trust is Foundational for Building Human Capital Strategy.

Trust is the foundational element of effective leadership and organizational success, according to the ON Partners report. Trust forms the bedrock upon which collaborative relationships are forged, enabling teams to navigate complexity with agility and cohesion.

According to Deloitte’s 2024 Global Human Capital Trends, trust across the organization has potentially never been more important.  It is the key ingredient for companies to flourish, but for many organizations, how to build and sustain it has remained elusive.

Related: Keys for First-Turn Portfolio Companies Using Executive Search Firms

As private equity firms operate within a high-pressure and time-sensitive environment, building trust becomes even more imperative. “Private equity has a pressure and a timeline that you don’t get from public companies,” said Mr. Mooney. “There are all these factors coming in that if you don’t get talent strategy, executive talent, and leadership capability as a lever in this next period, you’re not guaranteed to have any type of returns or results that private equity has had.”

Mr. Mooney underscores the importance of trust in the context of hiring new executives onto a leadership team, onboarding them, and maintaining talent assessment across the C-suite. He points out, “If you’re going to spend all of this time and all of the financial resources, how do you make sure that they integrate?”

“The statistics on executive onboarding further accentuate the significance of trust-building efforts, especially in the wake of the pandemic,” Mr. Mooney said. “With a notable increase in premature departures within the first 90 days, particularly among diverse leaders, investing in trust-building initiatives becomes paramount for private equity firms seeking sustainable talent retention and organizational success.”

Trust is also important when it comes to third-party consultation to aid in building a human capital strategy for PE-backed companies. “If you’re a scaling organization or if you’re a PE organization that’s just realized your leadership capability or your talent strategy isn’t meeting all the needs that you have, then you’re going to want to partner with firms that understand speed, understand simplicity, and can tell you the truth,” Ms. Mooney says.

“As a pure-play executive search firm that specializes in PE executive hiring, we understand a piece of this need,” said Mr. Mooney. “And we are honest enough with ourselves to know we shouldn’t be the whole talent strategy solution for our clients. That’s why we partner with advisors like Cher Murphy. Together, with our combined knowledge set, we embody real-world, practical applications of human capital strategy.”

“We all know that a trusted advisor relationship can be the catalyst to unprecedented results,” said Ms. Murphy. “PE firms previously focused on acquiring talent as the sole lever for value creation, in the human capital strategy. Executive teams and boards need to look at talent and leadership differently. Can they build a human capital strategy that aligns and drives their business strategy, and if not, where can they look for this partnership as talent continues to drive a competitive edge in PE?”

Related: Private Equity’s Shift In Thinking On Talent

Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Executive Editor; Lily Fauver, Senior Editor – Hunt Scanlon Media

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