Making the Case for Executive Development in Private Equity

Time is of the essence for PE firms, which typically only have about 16 quarters to achieve the right set of numbers with a portfolio asset. In such a time-compressed environment where cash is king, every dollar invested is rightly scrutinized. Perhaps as a result, many PE firms are disinclined to invest in executive development. We think not doing so is a mistake. In fact, when used properly, executive development can be a key driver in achieving the value creation plan.

As part of due diligence, many PE firms leverage executive assessment to make sure the C-suite is of the right caliber. Less scrutiny, however, is applied to leaders below the C-suite, even though they may well ultimately have a critical role in determining whether strategy is executed effectively. After all, often it is an organization’s key lieutenants who manage operations, mobilize resources, drive change, and deliver required results. Consequently, strategies are placed at risk when middle managers are not fit for purpose. To meet the new and increased demands dictated by the exit target, middle managers often need to scale quickly. However, they often receive little support in doing so.

By investing in the right kind of executive development, PE firms can better equip leaders for increasing levels of scope and complexity. With an executive development program that is targeted, customized, and designed to promote behavior change, significant improvements can be realized over a period of a few months and in a cost-effective manner. Measurement can be incorporated at different stages of the program to assess ROI and demonstrate impact.

Unlike many organizations, a PE firm is uniquely positioned to leverage economies of scale with an executive development program. Leaders from different portfolio companies can participate in a program together, thus allowing the PE firm to spread costs across multiple assets. By tapping into the broader portfolio, PE firms also can expose participants to other business models and environments. Doing so can be essential for cultivating an enterprise mindset and expanding networks for resourcing and problem-solving. Some firms already organize gatherings of portfolio company leaders, in part to cross-pollinate best practices and build leadership skills. Operating partners often have a role in coaching portfolio company leaders. Both practices can be enhanced with an executive development program, particularly one emphasizing skills (i.e., inspiring others, shifting culture, leading change, and managing stress behaviors) that might otherwise get shortchanged.

Last but certainly not least, a strong pipeline of talent can help command a higher multiple on exit, providing yet another incentive for PE firms to invest judiciously in developing key leaders.