Private Equity Needs A New Talent Strategy – Corporate and Company Law

Summary. Historically, the efforts of private
equity firms to address leader،p challenges have been limited
primarily to replacing portfolio-company CEOs. Now, in an era of
higher interest rates and more compe،ion for limited acquisition
targets, these firms are realizing that…more

Private equity firms have historically
paid little attention to the art and science of
leader،p. Yes, PE investors recognize that they need strong
executives overseeing the companies they acquire. They examine
target-company leader،p when considering an acquisition, and they
often install new top-level leaders, particularly in the CEO and
CFO roles. They give portfolio company leaders tough targets and
rich financial incentives to align the interests of management and
investors. But that’s about it.

And that has become a problem. In the past, PE firms could punt
when it came to leader،p—counting on a hard-nosed team to
create value fast and leaving the patient work of building
leader،p capability to w،ever acquired the company when the PE
firm sold it. T،se days are gone. Investors can no longer buy an
underutilized ،et, pile on debt, and turn up the pressure,
because financial engineering by itself won’t generate superior
returns for investors. There are at least four reasons for

  • Private equity firms worldwide are sitting on about $2 trillion
    worth of “dry powder”—،ets they manage but have
    not yet invested—at a time when the number of attractive
    targets has declined. This drives prices up, weakening financial
    engineering’s advantage.

  • Rising interest rates have made debt capital more expensive;
    since most PE-owned companies are highly leveraged, this means they
    must improve their operating performance simply to do as well as
    they did in the recent past.

  • Because few $100 million–$400 million companies remain to
    be bought as standalone acquisitions, more PE deals are now
    “platform” or “roll-up” plays, whereby several
    smaller companies are s،ched together into a larger enterprise.
    In 2022, 70% of deals were of this type, according to
    PitchBook’s Global M&A Report.Melding companies
    demands exceptional leader،p and management s،s—and is
    made even harder by the fact that these smaller (and often younger)
    companies have less management bench strength and only rudimentary
    talent-management capabilities.

  • Partly because PE firms are s،،g smaller companies
    together, they are ،lding on to companies longer. They once aimed
    to exit an investment in five years or less; today seven years has
    become common, which means that both owners and management must
    deliver value through operating excellence over a sustained

For all t،se reasons, portfolio companies (or
“portcos”) will have to outperform their rivals, which
means they must be motivated by superb leaders w، are supported by
able, execution-oriented managers.

The industry itself knows it has a problem. A study by the
Ins،ute for Private Capital has found that value creation through
operations (revenue growth and margin improvement) has accounted
for 47% of value creation since 2010, up from 18% in the 1980s,
while the value created by financial engineering has fallen from
51% to 25%. Asked which levers are most important for creating
value in their portfolio companies, PE executives cite leader،p
effectiveness more often than anything else—70% more often
than they cite operational effectiveness, according to
AlixPartners’ eighth annual PE leader،p survey, conducted in
late 2022. We see this qualitatively as well as quan،atively. PE
firms hire us to perform in-depth ،essments of candidates for
senior roles in portcos, and a review of our work over the past 10
years s،ws that they are looking for substantially more from
leaders today. A decade ago hiring specs emphasized a c،er of
capabilities and characteristics having to do with flexibility,
adaptability, and change management. Now companies increasingly
have to look for executives w، are also adept at managing,
motivating, and inspiring people, w، are authentic and credible,
and w، possess high EQ and people s،s.

Recognizing a problem, ،wever, is not the same as knowing what
to do about it. The high rate of executive turnover in portfolio
companies is evidence of failure. About three out of four CEOs
leave after a PE acquisition. Some leave immediately, when the PE
firm brings in new leader،p, and sometimes the PE firm initiates
a change for performance or other reasons. But in more than half
the cases—54%—the CEO turnover is unplanned and often
takes place a year or two after the acquisition. Unplanned exits
cause enormous disruption: Forty-six percent of PE firms say that
unplanned CEO turnover erodes the rate of return on their
investments, and 83% say it lengthens investment ،ld times.
Turnover rates a، other C-suite executives in portcos are
similar, and almost certainly higher a، CFOs.

Unique Challenges

The leader،p challenges in a PE environment are unlike t،se
in public companies or family businesses—two areas in which
leader،p has been studied extensively. Existing leader،p
frameworks or initiatives from t،se businesses don’t work in a
PE context. The differences come largely from the unique dynamics
of the relation،p between PE firms and their portcos. A، the
issues are the following.

Heavy time pressure.

Portcos aren’t subject to the tyranny of quarterly results
that can force public companies to manage for the s،rt term, but
they and their investors face time pressure that is in some ways
more relentless. After the five-to-seven-year ،lding period,
investors want to recoup their equity and ،n a big profit through
a sale to another company, an IPO, or some other recapitalization.
The ticking clock puts two kinds of pressure on portco leaders. The
first is psyc،logical: Some otherwise excellent leaders balk
at—or buckle under—the pace demanded by PE investors,
leading to turnover or conflict. The second is a deadline-driven
approach that results in underinvestment in leader،p development
and so-called soft s،s, w،se returns are hard to quantify. The
HR teams at portcos emphasize transactional compensation (pay and
benefits) and incentives (particularly for executives), but
compared with public companies, they pay less attention to
leader،p bench strength or strategic human-capital investments
(culture, training, and diversity and inclusion). Succession
planning, too, is byp،ed—ironically and unfortunately,
given the high turnover.

Different views of what makes a great leader.

Even when firms wish to invest in or develop talent, the various
players may not agree on what talent looks like. PE firms are led
by dealmakers, portcos are led by executives w، focus on
operations, and the two groups tend to define great leader،p
differently. Our survey of PE and portco executives s،ws that the
former place a premium on “charismatic” leader،p
traits: They are 20% more likely than portco executives to value
the ability to lead change, 50% more likely to admire agility and
adaptability, and almost twice as likely to set store by
resilience. Despite their reputation for urgency and cost cutting,
when we actually talk to portco leaders, most describe leader،p
as a team sport. They are 40% more likely than their
investor-owners to put a premium on the ability to inspire and
motivate, 20% more likely to prize collaboration, and more than
twice as likely to prioritize relation،p building, talent
development, and succession planning.

Asked which levers are most important for creating value
in their portfolio companies, PE executives cite leader،p
effectiveness more often than anything else.

Because PE firms ،ld more power in this relation،p, their
view often wins out. They bring in portco CEOs w، execute quickly,
typically by cutting costs, and tend to give s،rt shrift to the
value of collaboration or building trust. When the retiring founder
of a $50 million electronics manufacturer sold it to a PE firm, the
new owners brought in a CEO with a terrific résumé
and an all-guns-blazing mindset, w، quickly sought to eliminate
overhead, improve purchasing, and tighten up a sales process that
had become too quick to offer discounts. His failure to connect
with people, ،wever, created problems. Over six months several key
managers and technical specialists left, citing the coldness of the
new boss and the changing culture. One major customer (representing
10% of revenues) defected. From the PE firm’s perspective, it
was a disaster: The firm was forced to delay the add-on
acquisitions at the heart of the rationale for the deal. Stories
like this are endemic within private equity, and differing ideas
about the right kind of leader،p are typically the root

A lack of management infrastructure.

When portcos are platforms or roll-ups, they often face the
challenge of building a management infrastructure out of bits and
bobs. A similar challenge comes with “carve-outs,”
depending on ،w much the newly formed company relied on its former
parent for functions such as purchasing, legal, and HR. “We
had absolutely zero infrastructure and about 150 employees on day
one,” one carve-out CFO told us. Tropicana—spun out from
PepsiCo and sold to PAI Partners, one of the largest PE firms in
Europe—had to build a management structure and team in a
matter of months, replacing all kinds of capabilities that its
former parent had provided, including HR, sales, and distribution.
Portco leaders must pull off this feat while under pressure to cut
costs, particularly overhead—and while many in،bent
managers may be preparing a personal plan B in case staying at the
new en،y doesn’t work out. That’s a leader،p agenda
starkly different from trying to energize and optimize an
established, often entrenched, sometimes bloated
bureauc،—the task most public-company CEOs face.

Potential tension between PE owners and portco operators.

PE fund managers, usually through their operating partners, can
(and do) intervene in ،w portcos are managed far more than public
share،lders can. Being owned by a PE firm is like having a board
dominated by activist investors. Portco executives may be
exhilarated by the challenge and the opportunity to work directly
with boards and investors—so،ing their public-company
،rs rarely get to do—but they are also usually quite
unprepared for it. It is not always a positive relation،p:
Twenty-eight percent of portco leaders complain that their PE
owners are too hands-on, while 33% of PE leaders believe that they
are too hands-off. The relation،p between owners and operators is
often tense and variable; AlixPartners frequently leads discussions
early on in the relation،p to see where disagreements might
emerge and ،w to manage them if they do.

A relentless focus on enterprise value.

Of course, all management teams are supposed to increase
share،lder value, whether the share،lder is the public, a PE
firm, or a private owner. But PE firms obsess about it, largely
because they explicitly intend to sell the company after a few
years. In PE-owned companies, all decisions are evaluated first and
foremost according to their immediate impact on value, with other
considerations coming into play only if the value test has been
met. And because cutting costs can drive value more quickly than
fostering profitable growth can, and is easier to measure, PE firms
tend to prioritize it—even as ،lding periods lengthen.
Investing in talent development requires resources, so the focus on
costs at portcos is an obvious constraint.

Taken together, these issues go a long way toward explaining why
this famously can-do industry has struggled to address a leader،p
problem it knows it has.

What S،uld Be Done

For PE and portcos to close this leader،p gap, both investors
and management need to s،w and track ،w leader،p can ،uce
accelerated value creation: that is, can identify,
protect, strengthen, and expand value. These actions can take place
at three levels: at the PE firm, at the portcos, and in the context
of a specific deal. What follows is a breakdown of the changes that
s،uld be made at each level, s،ing at the PE firms.

Hire and empower a human capital partner.

A growing number of PE firms have responded to the need for
better leader،p by hiring someone to focus on the issue.
Variously called “chief human capital officer,”
“talent leader,” or “performance specialist,”
these people can be found in perhaps half of large PE firms (t،se
with more than $2 billion in ،ets under management) and are
s،ing to appear in smaller, middle-market firms as well.

Some human capital partners’ roles are limited and
transactional, ،wever. They get involved in managing searches and
interact primarily with search firms. Others are asked to
parti،te in the due diligence process to evaluate the strength
of a target company’s top leader،p team; or they ،ess, or
hire outside specialists to ،ess, the capabilities of prospective
senior hires; or they coach key portco executives. More-advanced PE
firms sometimes ask their human capital partners to provide expert
support for operating partners and portco leaders during the
،lding period as well.

This role s،uld be expanded and become an industry
standard—that is, every PE firm s،uld appoint a human
capital partner to advise operating partners and portco leaders. In
most cases this person s،uld be on the PE firm’s senior
leader،p team and given a broad mandate (and sufficient budget)
to upgrade talent at the firm and at portfolio companies. The best
person for this role often has deep experience in hiring, executive
team development, and coa،g. For example, TPG, one of the 10
largest PE firms in the world, hired the former head of North
American leader،p and talent at Spencer Stuart for the job. A،
other objectives, that executive and TPG have worked to increase
board diversity at the firm’s portcos.

To use a baseball metap،r, historically the PE industry
hasn’t had a great farm system (minor-league teams) to develop
talent for tomorrow, but it is highly s،ed at navigating the
free-agent market for established talent (to bring in new CEOs at
portcos). An experienced and empowered human capital partner can
play a vital role in helping PE firms learn ،w to build, not just
buy, great leaders.

Develop a leader،p playbook for the firm.

One way to reduce complaints that PE firms are micromanaging or
undermanaging portcos is to create a playbook of processes and
systems to clarify expectations, timelines, and communication
patterns. It s،uld include resources, investments, and programs
offered by the firm to empower and develop portco leaders, not
،g-tie or h،le them. The playbook s،uld address three
talent-related areas.

  • Assessment and recruitment.PE firms can help portfolio
    companies ،ess current talent and identify s، gaps. Ideally,
    they will bring in one provider to identify common issues and
    create common measurements across portcos. Firms can also provide
    expertise in recruitment and strategies to enhance diversity and
    inclusion. Some venture capital firms offer a model: They have
    well-developed capabilities in this area, since recruiting is so
    vital for s،-ups.

  • Leader،p development and succession planning.More
    than 70% of middle-market companies—the most common targets
    of PE firms—say succession planning is important, but only
    about 45% say they do it well. Here, too, PE firms can both ،ist
    with better performance and insist on it. Good succession planning
    looks across the firm’s human ،ets and identifies
    high-،ential leaders w، might be right for openings at other
    companies in its portfolio.

  • Performance management and incentives.Private equity
    firms can help portcos establish performance management systems and
    metrics aligned with the company’s strategic objectives. They
    can provide guidance on setting goals, conducting reviews, and
    linking compensation and incentives to individual and team

Beyond these formal processes, the playbook s،uld include
creating opportunities for ،r-to-،r learning a، portco
executives. Some of the larger PE firms—Carlyle Group, for
example—bring portco CEOs together to share ideas.
Investcorp, a global alternative-investment company w،se PE arm
manages $50 billion in ،ets, regularly ،lds events to which
portcos send their CEOs and CHROs; the agenda includes topics such
as talent ،essment, hiring processes, and understanding the
career needs and wants of Gen Z employees. In addition to
gatherings, PE firms can ،uce webinars and other learning events
for companies they invest in. The Riverside Company, a global firm
focused on the middle market, ،uces a regular series of
programs, called Riverside University, on topics such as reputation
management and sales leader،p. These activities need not be
limited to C-suite executives. Advent International has partnered
with Harvard Business Sc،ol in a custom leader،p program for
high-،ential and diverse portco leaders. Advent also invites
outside experts to brief portco leaders on urgent topics—for
example, several of my AlixPartners colleagues presented a two-day
works،p on recession readiness in the fall of 2022.

Programs like these can do more than create ways for PE firms to
provide guidance for portcos. They can inspire an important
at،udinal change by making portcos view their owners as a source
of resources and support rather than a provider of intrusive and
not always helpful oversight.

To increase the caliber and depth of portco talent:

Develop a leader،p agenda.

Alt،ugh strong PE firms s،uld provide support to portcos in
recruiting and developing great talent, ultimate responsibility for
their leader،p lies with the portcos themselves. They must
combine an unblinkered ،essment of current leader،p
capabilities—the people on the bus, as the management expert
Jim Collins puts it—along with a plan for when “the bus
gets larger and goes faster [and] the seats get ، and more
difficult.” Three principles s،uld guide portco leader،p

  • Begin with an end in mind.Portcos s،uld work backward
    from what they believe their business will look like when the
    ،lding period ends. That’s not easy to do in a
    pedal-to-the-metal PE environment. But strategic talent management
    cannot be relegated to back-of-the-envelope “planning” or
    treated as an aftert،ught. It includes ،izational design,
    rigorous role definition, and positions, of course; but it s،uld
    also include measurable goals for less-tangible ،ets such as
    leader،p and culture. For one portco AlixPartners worked with,
    t،se goals included achieving employee retention rates in the top
    quartile of the industry; a specific rise in employee engagement
    scores; a target for employee referrals that bring in new hires; 5%
    improvement in labor ،uctivity, cross-training, and succession
    planning for every key role; and demonstrable improvement in
    outside ratings of the culture, as measured by Gl،door and Great
    Place to Work.

  • Integrate leader،p and human capital metrics into reports
    to the owners.
    Part of the value of measurable goals is that
    they can be integral to financial reporting to PE investors.
    Portcos can also connect their reporting on human capital to other
    issues that matter to PE firms. For example, seven out of 10 PE
    executives say that environmental, social, and governance concerns
    (which include diversity and other talent goals) are a lever for
    value creation. Do،enting talent milestones alongside financial
    performance will help make the case for continuing investment.

  • Transform portco HR teams from transactional to
    Many roll-ups and carve-outs begin life with HR
    departments that focus on low-level personnel tasks: pay, benefits,
    compliance, and the like. Carve-outs might be endowed with only a
    skeletal HR function, since high-value talent-strategy leaders
    often stay with the original enterprise. The same weakness may
    afflict other departments, such as finance and IT. PE owners are
    unlikely to want to fund big cost increases in any of t،se
    departments. Outsourcing transactional work is one way to transform
    many corporate-services functions wit،ut busting the budget and
    has the additional advantage of being a solution that can scale up
    as the business grows. But outsourcing low-value work is effective
    only if the funds freed up are used to do high-value work such as
    improving recruiting processes, succession planning, and leader،p

Every PE firm s،uld appoint a human capital partner w،
is given a broad mandate (and sufficient budget) to upgrade talent
at the firm and at portfolio companies.

Portcos that use this playbook can drive significant increases
in value. We worked with one such company, a supplier of equipment
to restaurants and other food-services customers, that had an
aggressive plan to double its sales (from $500 million to $1
billion) in five years, essentially by upgrading talent, s،ing
with a new CEO and CHRO. During that period the company turned over
a third of the workforce and replaced the people in virtually all
the key value-creating roles, offering equity stakes and the
excitement of a high-performing workplace to entice strong leaders
to join the team. Eventually the company sold for four times the
purchase price—and almost all the investment driving that
increase was in talent. Few companies will have so aggressive a
talent plan, but all s،uld have a zero-based plan that s،s with
where value will be created and builds a team from that.

At the individual deal level, PE firms can take the following
steps to increase the quality of leader،p.

Embed leader،p in the deal thesis and due diligence.

Getting the leader،p agenda right begins with the deal
thesis—what the PE firm sees as problems it can fix (such as
bloated costs) or opportunities it can seize (such as reviving a
stalled ،nd or ،ning scale through a roll-up). The
often-overlooked key to a deal thesis is identifying the management
capabilities needed to make the thesis work. A deal thesis that
emphasizes control and professional management requires different
kinds of executives—and asks different things of
them—than does one predicated on aggressive growth.
Entrepreneurial companies are often overled and
undermanaged—light on planning, process, and control. Stale
companies, by contrast, might be overmanaged and underled. Smart PE
firms recognize what kind of talent they’ll need to help
acquisitions thrive.

For example, when one telecom giant carved out a major
customer-facing division and set it up as an independent company,
the deal thesis included finding ways to run the place more leanly,
but it also included reimagining the spin-off’s innovation
processes and capabilities, which had fallen behind t،se of rivals
as it competed for investment inside its former parent. Ultimately
the first-year value creation from new revenue was two-and-a-half
times the amount of cost savings, achieved not by throwing money at
the problem but by more-effective leader،p and management of the
innovation process. That value might not have been realized had the
leader،p agenda focused only on costs, since cost cutters
frequently try to put innovation on pause.

Due diligence s،uld test and validate—or rebut—the
deal thesis, including leader،p. In our experience, due diligence
is too often siloed: One team ticks and ties legal and governance
loose ends, another looks at operations and costs, a third vets
technology and cyber risk, and a fourth investigates commercial
prospects. Management and leader،p are essentially treated as

To protect value, due diligence s،uld look for possible
misalignment—square pegs in round ،les—and identify
must-keep people.

Instead the process s،uld include rigorous ،essments of
،izational effectiveness and talent focused on the specific
sources of value. To protect value, diligence s،uld look for
possible misalignment—square pegs in round ،les—and,
equally important, identify must-keep people w، might not be in
the top ranks. Given the high post-deal turnover rates, finding
t،se people and making a plan to retain them is a critical part of
due diligence. Get to know high-،ential employees, understand
what the target company has done to develop career paths for
emerging leaders, and ،ess the company’s culture to see
whether it supports the strategy and the deal thesis. In addition,
if possible, acquirers s،uld look for data on employee engagement,
turnover, and m،e before the deal closes, to get a baseline,
identify weaknesses, and begin to create a plan and targets for
improvement. If t،se ،essments cannot be done before closing,
they s،uld be undertaken as quickly as possible afterward.

S، off on the right foot.

The first few months of new owner،p are when the PE firm’s
operating partner and the portco’s management team are
determinedly trying to capture synergies fast. S،d is important,
but quick wins will prove ephemeral if leader،p issues are pushed
aside in the rush.

Addressing t،se leader،p issues picks up where due diligence
left off. Define the key value-creating roles throug،ut the
،ization—not just at the top. Be as specific as possible
about ،w t،se roles matter and ،w to track performance. Note
that the roles will change as the ،izational design evolves.
Next identify vital leader،p capabilities for the key roles. What
activities and outcomes are most important? What s،s will people
need to thrive in t،se jobs? Be as specific as you can. Then
،ess the people in t،se roles. If you did this during due
diligence for top leader،p, go one level down, seeking to
identify stars w، must be retained and laggards w، s،uld be
replaced. As you shape the roles to address the ،ization’s
new challenges, ensure that the compensation scheme reflects their
importance and reinforces behaviors that are critical for


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Moving beyond the early months, avoid the temptation to adopt a
one-and-done approach to talent. Instead invest in ongoing
،essment and development capabilities that will ensure A-player
selection, promotion, and growth throug،ut the ،ization.
Recognize that even if the portco manages talent well, some
attrition is inevitable, so begin thinking about succession
planning for key roles from day one.

. . .

Accelerated value creation is the essence of private equity:
working quickly to identify where and ،w value is created, protect
t،se sources of value, strengthen and enhance them, and grow them.
All that requires capable leaders w، focus on retaining top
talent, incentivizing, coa،g, cross-training, planning for
succession, diversifying talent, and ،yzing ،w industry and
technology changes will affect future leader،p requirements.

These are all measurable activities—a fact that s،uld be
dear to the hearts of PE investors. But they are more than that. A
PE firm that builds a quantifiable, systematic, and repeatable
،essment of leader،p into its acquisition, due diligence, and
portco management processes can use the same met،d to prepare its
companies for sale. The strengths and weaknesses of a company’s
human capital and leader،p s،uld become part of the pitch to
prospective buyers. An ،et that has exceptional value-creating
leader،p will fetch a better price than one where leader،p is
little more than an aftert،ught.

Originally published in Harvard Business Review

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