Tomorrow’s PE Value-Creation Toolbox: Five Levers Integral to Driving Growth
What will be in tomorrow’s value-creation toolbox? Here are five levers that will be integral to driving portfolio performance over the next five years.
Originally published in Private Equity International’s Operational Excellence Issue, October 2022.
1. Talent recruitment and retention
Human capital has always sat at the heart of private equity value-creation strategies, so it is no surprise that the people agenda remains integral to the toolbox of the future, writes Claire Coe Smith. Still, things have moved on significantly since the days when the talent lever started and finished with the recruitment of a new chief executive.
Dr. Matt Brubaker
Matt Brubaker, CEO of FMG Leading, says: “The place where everybody immediately goes is to whether they have the right chief executive, and is he or she fit for the job? The real leverage starts to happen when you are able to look at the entire organisation as a whole and see where people-related investments will drive the biggest returns.
That is not just in the C-suite – there are non C-suite roles in every business that have the ability to have an outsized impact on value creation. Understanding that is where we are starting to see investors developing a higher degree of sophistication.”
A growing number of PE shops now invest in an in-house HR capability to work across the portfolio, sharing best practice and focusing on much more than just recruitment.
Lisa Telford joined mid-market firm Montagu back in 2017 with just such a brief. “When I joined Montagu, HR was normally a C-suite minus one role and was not on the radar of the investment partners,” she says. “That has completely changed and that is because the value-creation strategy is all about change, so if you haven’t got somebody sitting at the top table to help the chief executive drive that change through the business, you have an issue. We have really focused on upgrading that particular role.
“The real leverage starts to happen when you are able to look at the entire organisation as a whole and see where people-related investments will drive the biggest returns.”
“We are now doing a lot more work around partnering with Montagu management teams to accelerate top team performance, because it isn’t down to individual performance. This is particularly important when we are hiring new C-level talent as we tend to over-hire for the company we want to create, rather than the company it is today. Therefore, helping them to onboard successfully and integrate into the team is key to success. You can have the best strategy in the world but if you haven’t got people aligned and capable of executing on it, you are nowhere.”
With an intense war for talent currently in full swing, and the post-pandemic shift to new ways of working upending the parameters of talent recruitment and retention, getting the right people has never been more critical to growth.
Eric Liu, head of North American private equity and global cohead of healthcare at EQT, says: “For me, talent is the number one consideration, period. The private equity business is a talent business and that is the most important thing we do both at EQT and in our portfolio companies.”
2. Culture and Purpose
The culture and purpose of a portfolio company can play a key role in effecting change – it may be linked to the talent agenda but increasingly warrants focus in its own right.
FMG Leading’s Brubaker says: “Businesses are driven by culture, whether that is strategically and thoughtfully planned or not. Leaders have got to understand the motivations and demographics of the workforce and enable those individuals to feel good about engaging with the business.
“Getting culture right for the particular needs of the particular workforce in a particular place and time requires not big and broad words but many micro actions that are truly unique to the business. Those daily behaviours translate into building a culture that is strategically aligned with the way you want to create value.”
Embedding the right culture in a business is critical to addressing risk, compliance and governance, and is a growing
focus of regulators. In addition, a clear corporate purpose has the potential to create value not only by empowering employees but also with customers and other stakeholders.
Dr Matt Brubaker is CEO of FMG Leading. A frequent adviser to private equity firms, he also serves as an operating partner at Windrose Health Investors.