The Rise of the Private Equity Chief Talent Officer

October 28, 2021 – While drawing down on committed funds and having capital “at work” is most people’s core understanding of what the modern private equity firm does, having the right human capital in place to maximize return-on-assets and marshal the firm’s capital adequately is of equal critical importance. Against this backdrop, it is perhaps a logical development to see the evolution and rise to prominence of the chief talent officer role in the modern PE firm, according to a recent report from Leathwaite.

Often an operating partner within the firm structure, denoting
the seniority of the role, the chief talent officer takes ownership of the talent agenda within the portfolio companies – ensuring the leadership is fit for purpose and possesses the capabilities necessary to deliver on the agreed strategy, according to the Leathwaite report. “Where capability gaps exist, working with the management to set the right learning agenda to bridge the gaps, or going externally to buy in those capabilities, are two natural courses of action,” said Anne Loftus, a consultant for the global HR practice at Leathwaite and the report’s author. “The PE CTO role continues to evolve in scope and grow in prominence.”

Leathwaite noted that what was a “nice-to-have” 10 years ago
has become a critical role or “table stakes” where competitive advantage among PE firms is concerned. In their 2010 book, “Talent Masters: Why Smart Leaders Put People Before Numbers,” Bill Conaty and Ram Charan refer to talent management as the core competitiveness of an enterprise. This is at the heart of the chief talent officer role.

The Role
There is no one set formula or job description for the role – the position varies widely, so it is important for the firm to identify priorities and expectations (as well as pain points) and align with the investment strategy to determine the CTO profile best suited to the firm, according to the Leathwaite report. Overall, the search firm said that the CTO is responsible for driving organizational effectiveness and performance.

Leathwaite pointed out several main components to the chief talent officer role:

Talent acquisition: Some PE firms seek out executives who can dedicate themselves to recruiting often when further growth is contingent on bringing in new talent. “This requires understanding both business needs and culture. Integrating diversity into recruitment strategy is a priority,” the firm said. “A major PE player has recently mandated reaching one-third diversity in its portfolio company leadership ranks. On-boarding and assimilation are also important especially while much recruiting is done virtually during COVID-19. Having a consistent framework to help new leaders enter the company and approach their new role successfully is key,” said Ms. Loftus.

Talent management and assessment: Leathwaite also said that building internal leadership capabilities, strengthening the bench, building an internal pipeline of talent are critical. Executive coaching can be a big part of the role.

Broad HR and operating support: Building and leading effective sustainable processes and programs including incentive structures, etc. are essential. Other components include introducing human capital best practices and leverage tools within and between portfolio companies. Employee experience, culture, engagement and return to work are of heightened importance in the face of COVID-19.

Governance: The CTO navigates changing landscapes related to regulatory, employment and global / national issues – e.g. social issues such as BLM. Leathwaite notes that PE firms, given the breadth and depth of their investing (and as an extension their CTOs) also have the opportunity to influence boards and leadership for the good on environmental and social issues and making their businesses attractive places to work from a purpose and values perspective.

Due diligence and Integration: The chief talent officer ensures that technical aspects of diligence are resourced properly and oversees leadership / culture assessments to inform talent decisions and integration approach.

Keys to Success
The most successful CTOs are those who build successful relationships – and credibility – with the portfolio company CEOs and leadership teams and with the operating partners at their firm, according to Ms. Loftus. “Secondly, it is important to learn the language of PE and how the firm operates,” she added. “An open line of communication with the deal teams is also important. All this requires gravitas and leadership experience.”

“Many CTOs also stress the importance of not taking a formulaic approach,” said Ms. Loftus. “Whilst the talent management community at large is packed with highly qualified, Ph.D.-level organizational and learning psychologists, a pragmatic fit-for- purpose approach that is contextual to the portfolio company in question is the difference between good and great.”

Key Challenges
Prioritization: Most talent chiefs have small teams and can become victims of their own success when deal teams and portfolio companies get wind that the function is an effective one, according to the Leathwaite report.

Time: “Overseeing search and recruiting takes on a disproportionate amount of time; and recognizing that building value-added talent programs takes time,” according to the Leathwaite report. “Additionally, given the nature of exits and new acquisitions, the portfolio keeps evolving.”

Diversity: While many industries are making strides in their
D&I hiring efforts, PE is lagging. Today, just 18 percent of PE professionals are female, with just 10 percent in senior roles. For professionals of color and those who identified as LGBTQ, the numbers are even more discouraging.

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