Bain & Company’s recent 2018 Private Equity Report highlighted a crucial imperative for PE funds looking to create portfolio company value. As they face heavy competition, high asset prices and the threat of an economic downturn, PE firms must improve their ability to create company value through better leadership and execution, or face middling returns.
Bain’s research and analysis identified several strategies for improving value creation through improved leadership and execution, with top-performing firms showing the way. One of these is learning to identify the right team early on and fill roles with fit-for-purpose talent.
As the report explains, “Firms that can master these skills are those most likely to outperform the averages, as producing top-tier returns becomes harder each year.” The way to get started is by matching leaders to mission-critical roles. This is crucial because portfolio company performance correlates strongly with having the right team in place from the beginning, especially when profitable growth is the key to achieving superior returns.
Where Company Management Assessments Go Wrong
Unfortunately, PE investors tend to take an overly positive view of management teams during the early stages of the investment process, with over 90% believing management teams are strong or at least “medium” in quality. Subsequently, they hesitate and struggle to make the early, crucial decisions in the C-suite and elsewhere in the organization. Some of this may stem from the courting of company leaders during due diligence and negotiation. Bain & Company suggests this often gives way to a “post-close honeymoon,” when funds may be inclined to give leaders a chance to prove themselves.
However, this hesitation can be a major source of value loss and often leads to unplanned replacements and corrections for substandard performance. Ultimately, PE firms need to avoid this hesitation and make a more thorough and sober assessment of management. They must define and fill the key roles throughout the organization that are essential to executing their value-creation plan.
This starts with determining the capabilities needed for the organization to deliver on the fund’s investment. Following this comes the identification of the corresponding roles and fit-for-purpose talent needed to execute the plan and address any areas of the organization that need immediate change or improvement. PE firms then need to identify and hire the right candidates, which is now possible through both traditional and emerging channels, including on-demand talent services such as Graphite.
Once any preliminary moves are made, it’s then important to create a rapid feedback loop to determine what is working well and where additional changes or improvements may be needed. The right approach will also provide a great system for analyzing future portfolio talent decisions.
Using Value Creation as a Better Guide
Rather than assessing leadership based on what has worked in the past or whether a team is “good enough,” Bain & Company recommends asking a more pragmatic question: “Is this management team fit for our purpose?”
Ultimately, that purpose is creating value and leading any new strategies and execution required to achieve it. For example, if a deal is predicated on growth through M&A, business development and financial skills are vital. If there’s a need to generate organic growth, then experience with sales force effectiveness, pricing and market segmentation may be crucial. If costs are a focal point, then sourcing, supply chain and operational expertise may be priorities.
The Importance of Mission-Critical Talent
Once the specific needs of the value-creation plan are identified, talent needs to be matched to these requirements at all levels—from the C-suite to the front line. A PE firm must define all the mission-critical roles and find the right people to fill them. This begins at the top and may require a change of CEO, though it’s not always necessary.
As Bain & Company suggests, “What matters is that the incumbent or a replacement is fit for purpose, and that the fund makes the right call early in the investment period.” This rigorous assessment and validation must also apply to all C-suite roles, which must be carefully defined and evaluated early on and according to the company’s new mission and strategies. It might even mean defining and creating new roles, eliminating others, and reshaping roles to focus on new priorities.
Beyond the C-suite, value creation also depends on mission-critical roles elsewhere in the organization. These roles may be small in number but enormous in their impact on value. As with the C-suite, these roles should be identified and assessed early in the investment cycle and then filled with top talent.Bain & Company defines a mission-critical role according to two criteria:
- How important is the role to the overall value of the business?
- How much does superior individual performance contribute to success in that role?
By asking these questions, PE firms can distinguish between roles that demand top players and those that can be sustained by putting the right technology, processes or repeatable playbooks in place. Mission-critical roles are typically located at the intersection of both high importance of superior individual performance and importance to overall business value. They require quick thinking and decision-making capabilities that will have a direct impact on a company’s performance against plan. They also tend to be customer-facing and involve frontline interactions, negotiations, and relationship-building, and success in these roles also begets success in other roles.
Ultimately, it’s about the quality of talent and the importance of these roles and not quantity. As Bain & Company’s research has revealed, top-performing companies don’t necessarily have more A-level people but are relentless in deploying them in the roles critical to the company’s success. This, of course, brings us to the issue of where and how to find the right A-level talent and fill those mission-critical roles.
Finding & Hiring Mission-Critical Talent
In some cases, a top new CEO will bring additional A-level talent to a portfolio company, but PE firms can’t assume this or rely on it. To ensure the right talent is ultimately put in place, a firm way want to rely upon its own network of proven C-level and mission-critical talent. However, a fast-emerging alternative is to tap into on-demand networks of pre-vetted and experienced C-level and other business talent such as Graphite.
At Graphite, our network of over 5,000 pre-screened and highly qualified professionals has served as a crucial short-term and long-term talent resource for PE firms as well as VC firms, major corporations and startups.With success stories at Millbrook Capital Management, SFW Capital Partners, and many others, we not only connect PE firms with top-tier talent for their portfolio companies, but we offer access to proven experts who can help with due diligence, financial analysis, assessment of company talent and more. To learn more about our talented professionals and how to leverage the Graphite network to improve your investment returns, visit www.graphite.com now.