Talent Management Strategies for Mitigating Leadership Risk in Private Equity
Ask successful investors what they look for in portfolio companies, and many will tell you they’d rather put money on an average strategy in the hands of great talent than on a great strategy in the hands of average talent. That’s because in private equity (PE), where generating high returns within a short time frame is the goal, selecting the right leaders is crucial.
Research shows investing in inadequate leaders can be costly. Up to 68% of chief executive officers feel unprepared for their role, and 50 to 70% of executives fail within 18 months. This risk is amplified in PE, where leaders may not be fully prepared for their role post-deal. Leading the company post-deal will almost certainly be very different to pre-deal, and even leaders who have been hugely successful up to this point may be unprepared for a bigger role, a different culture, a new evolving operating model, increased leadership demands, or expanded scope. Therefore, identifying and mitigating leadership risk is a vital aspect of PE due diligence.
It’s easy to see why investment in the senior team is important in retrospect, but it’s not always carried out proactively and intentionally. Remedial action follows when it’s clear the leadership agenda is not being effectively progressed, but it might be too little, too late and/or extremely costly to remedy. Without addressing the people dimension of risk, a deal might fail to fulfill its promises.
So, what can private equity firms do to mitigate leadership risk?
Act quickly for the best returns
Assessing the leadership team members (as individuals and as a team) once the deal has been completed allows areas for development to be identified and addressed.
When thinking about senior-team roles in a newly acquired business, consider whether:
- You are clear about the difference in what you’re asking of leadership post-deal compared to expectations up until this point.
- You have translated that expectation into specific dimensions of leadership. For example, if the investment thesis calls for growth through mergers and acquisition, does your team have the capability to lead a successful integration of a newly acquired company?
- If leaders don’t have the experience, how will you recognize how well equipped they are to navigate things they have never done before?
Acting quickly post-deal to actively develop and coach executive team members is one of the best ways to de-risk the deal. Conversely, if due diligence on the leadership team doesn’t happen until PE partners notice a gap between expectations and reality, recovery takes longer and damages the value creation plan.
De-risk the people part of the plan
Taking a structured and intentional approach to ensuring you have the right leadership talent, as well as a strategy-supportive culture, is a vital component in the realization of value-creation plans. Context is everything, and it’s important to take the time to understand the unique challenges and opportunities for each company.
Portfolio leaders post-acquisition are often stretched and challenged by new and different expectations of them from their new owners. It’s helpful to truly understand the history of the business and its evolution in order to explore the implications for leaders and the change in their leadership that a new owner’s ambition often requires.
Assessment in the post-deal scenario removes the bias around what we think good should look like and offers an expert view of what good really means in the new business context—and how well prepared leaders are to take on the next stage of growth. And, in the grand scheme of things, it’s a small incremental investment to massively de-risk the plan.
At RHR International, we believe our expertise, discipline, and rigor can assist investors to address both strategy and talent in equal measure to accelerate the achievement of the ambition they have for their targeted or acquired assets.
Download our research study What It Takes to Succeed in Private Equity to find out more.