The Human Capital Imperative in PE Investments

At Private Equity International’s Operating Partners Forum, I was privileged to chair a session on the evolving role of the operating partner alongside Simon Hardy, head of portfolio operations at Attestor, and Jocelyn Dehnert, senior operating partner for leadership strategy at Hanover Investors. The overriding message from the discussion was to recognise the complexity of the job facing operating partners who are tasked with delivering a complex transformational change agenda, often with an unprepared (and likely exhausted) portfolio company leadership team.

Amid the urgency of addressing so many dimensions of change at once, operating partners may overlook human capital. Access to skilled professionals who can provide an objective assessment of talent is often limited as well. But addressing human capital opportunities sooner rather than later not only enables the value creation plan, it also potentially accelerates the transformational change agenda. 

Implementing the post-deal 100-day plan can be an extremely intense experience for all involved, so how can companies make sure the human capital part of the equation becomes seen as an essential and integral part of the plan?

The Role of the Operating Partner

Once the deal has been finalized, the clock is ticking. Operating partners, who may or may not have been involved in pre-deal due diligence, have multiple priorities competing for their attention, including pricing, routes to market, sales structure, or any of the other myriad value creation levers. In translating the investment thesis into the value creation plan, the focus is naturally on turning strategies into executable plans. The challenge for the operating partner then becomes ensuring both the capability and capacity of the resources available are a good match to the tasks. Key, therefore, is securing the buy-in of the portfolio company’s executive team and prioritizing, pacing, and sequencing the work.

The Role of the Portfolio Company Leadership Team

Meanwhile, the portfolio company leadership doesn’t get a moment’s rest after the buildup to the deal. Having been through the investment process that involves running the business whilst pitching for next-stage funding, after deal signing, the team is immediately tasked with implementing a raft of change initiatives and driving a new and different strategy that most likely puts very different demands on them. The leadership team is instantly charged with operationalizing the value creation plan. Those who are poorly prepared for their new roles may not make it past the first 100 days, resulting in unplanned disruption to the business. The team must be prepared, skilled, and supported if they are to support the success of the value creation plan.

Putting it in the Hands of the Right People

Regardless of how strong the investment thesis looks on paper, the strategy must be put in the hands of the right people. Replacing an ineffective leader can take months and cost hundreds of thousands of dollars. Estimates of the true cost of a “bad” executive hire range from 2.5 to 27 times their base salary. Therefore, it’s essential that human capital be considered at each stage of the investment life cycle.

Based on RHR’s work with clients and our discussion at the PEI event, the model below summarizes some of the key human capital considerations at each stage of PE investment.