A recent Forbes article by Matthew Kirdahy titled “Filling the Talent Pool” begins: “The focus at private equity firms is shifting. Cash will always be king, but looking ahead, the most important type of capital may very well be human. It's a company's bold leadership that carries it into financial prosperity—not its product, services or numbers.” This new focus on talent will surely improve the success rate of acquisitions, which is typically rated at less than 50 percent.
Because the nature of private equity groups is to operate at a pace that’s at least twice that of other companies, finding the right human capital can require two to three times the effort it takes to find C-suite talent for other organizations. PEGs have historically invested in the top-performing businesses in high growth markets and many are now buying smaller and even start-up firms in emerging markets. At both ends of the spectrum talent due diligence is as important as financial due diligence in acquiring companies and integrating them. With the promise of great reward on one side and the high risk of acquisition failure on the other, a rigorous process of recruitment and assessment can be crucial to a PEG’s portfolio success.
A PEG’s world
When a private equity group buys a company, your strategy is short-term change through organic growth. You may purchase larger companies for their great management teams and proven track records, simply replacing the CEO with one who can lead the company in the desired new direction. And you may put together an entirely new management team that’s experienced in change management to lead smaller companies. In either case, hiring bold leadership is required to meet your investment goals. Why bold?
A successful CEO in a typical corporate situation can change companies and adapt well, given a little time: get to know the team before being hired, maybe replace a few team members over the course of a year or so, build a support system, think about some new initiatives….
Contrast that scenario with the new CEO of a large-company PEG investment who touches down in a new culture with no internal support and no knowledge about where to get information – and is immediately tasked with setting a new direction for the company. Or, the CEO of a smaller portfolio company who takes on an entirely new management team that hasn’t worked together before and yet has to set a course of change for employees who are probably resisting every step of the way.
Change is difficult in any situation, but leading change in a portfolio company takes a leader with special fortitude, flexibility and judgment—someone who is bold.
Traits of a bold leader
What characteristics should PEGs look for in recruiting CEOs and other executives for portfolio companies? In addition to all the normal leadership skills you expect in an executive, PEGs should look for traits like the following that define a CEO who can deep dive into the organization quickly and find the top few priorities to focus on, all within the first few months:
• Entrepreneurial outlook
• Hands-on change management style
• Strategic visionary
• Excellent communicator with all constituencies
• Asks a lot of questions
• Willing to challenge unrealistic goals
• Seeks advice from others
• Able to attract and retain top talent
• Skilled at sales and marketing as well as financially astute
• Able to cultivate a sense of urgency, motivate and galvanize
Such leaders are difficult to find. A variety of assessments help select for these critical traits and should be a key part of the recruitment process. Assessments should also be incorporated into overall talent management throughout the investment period.
Confirming with assessments
In the fast-paced PEG environment assessments can play a key role in quickly confirming that you have the right talent in place and in developing the skill sets you need to stay nimble.
Assessments give you insight into the characteristics and skills of individual players and help evaluate the strength and weaknesses of teams. A good practice is to assess management within a few weeks of an investment to help understand the quality of the executive team; identify capabilities gaps; measure commitment; and pinpoint issues that need management attention. Assess again in six months to measure progress and confirm that the right team is in place.
Although every company can benefit from assessments when making key talent recruitment and management decisions, PEGs don’t have the luxury of time to correct errors in decision making and should consider assessments a necessity.
A profitable exit
A focus on human capital begins with recruiting leaders who have the right experience and characteristics to lead the quick change private equity groups are looking to achieve. Assessments can ensure that you stay on the right track and are able to exit—profitably—within the usual three-to-five year timeframe.