A lack of sufficient portfolio company executive leadership talent is acutely felt in private capital, and investors need to get both creative and inclusive:
Market Realities
Volatility Delaying Exits
Transaction delays have lengthened average investment horizons and placed many investors under pressure, increasing restlessness for returns;
Private capital investors entering new industry verticals and pursuing more complex deals are finding even fewer executives with bullseye experience. Of this small pool, fewer still have successfully completed an exit and among those, even fewer are motivated to do it all again for a different investor;
In a shallow talent pool, how does a private capital investor increase the odds of attracting the right executive leader and fostering their success?
Transformation
Leadership Paradigm Shift
Private capital is of necessity embracing more sophisticated methodologies to recruit, assess, and increasingly develop new “stables” of executive talent for the future;
This requires investors, boards, and CEOs to consider leadership talent without direct experience in private capital-backed portfolio companies as worthy of further investment.
Gauging a leader’s potential to succeed in a private capital environment is essential. Clearly defining success given market/exit ambiguity requires more communication and assessment embedded in both recruitment processes and onboarding periods.
How has your own leadership talent strategy been impacted by market volatility?
Changing dynamics
New Paths, Longer Horizons
Experiential use cases to consider for leaders with potential in P/E include driving turnarounds, scaling and/or transforming businesses, incubating innovations, integrating acquisitions, etc.
Psychometric tools, data, and analytics can add to a firm’s intelligence about a leader, and can be tailored to prioritize indicators aligned with success in private capital environments;
Longer investment horizons also offer an alternative opportunity for investors to “grow their own”, i.e. accelerate the succession of bench strength, exit poor performers and nurture the next generation of emerging leaders;
How does your organization think about assessing leaders and their potential?
Diversity
Improving Too Slowly
Private markets significantly lag in board-level gender and ethnic diversity. Women make up only 22% of the C-suite at the median private company and only 57% of private companies have a woman on their board. In 2023 only 14% of private companies have one or more directors from an underrepresented ethnic or racial group, a paltry 1% increase over 2022.**
While backlash from certain LPs has been highly publicized, most institutional investors continue to press private capital about DEI improvement within portfolio companies and their boards. Best practices tracking and reporting metrics on both investment teams and portfolio companies.**
What steps are you taking to accelerate diverse thinking and experience in your leadership?
*AlixPartners 8th Annual PE Leadership Survey, 2022.
**BCG https://www.bcg.com/publications/2023/how-leaders-can-improve-gender-diversity-in-private-equity
***The state of diversity in global private markets: 2023, McKinsey, August 22, 2023.
Empowering Human Capital Partners
More sophisticated human capital leaders are having a positive impact on leadership in portfolio companies despite their roles being relatively new.*
Longer investment horizons, dry powder, and challenging deal flow have required human capital leaders to drive a more holistic approach to talent. The function is shifting from primarily acquisition (working with and sometimes poaching from executive search firms) to a full spectrum of assessment, recruitment, retention, development, and coaching over longer, less transactional periods.
Consequently, the profile of the human capital role is evolving. Recruitment experience remains important, however, broader skills in assessment, org design and coaching/development are changing the job spec. Firms are seeking more seniority, breadth of leadership advisory skills, proactive problem-solving, and a willingness to challenge the status quo.
These leaders when empowered can expand private capital’s horizons to consider alternative talent pools and open rich new veins of leadership for portfolio companies. Their advisory capacity can further increase those leaders’ chances of success.
How is your organization strengthening its human capital function to meet the talent needs of your portfolio companies?
*https://hbr.org/2023/11/private-equity-needs-a-new-talent-strategy
Accelerating Diversity in Private Capital
The need for private capital to improve diversity within both investment teams and portfolio companies leaves little room for debate and the evidence of positive returns from diverse leadership continues to grow. On the investment side, recent research cites firms with more representation of women and people of color can unlock access to differentiated deal flow.***
Likewise in portfolio companies, diverse leadership talent can drive operating value. Organizations with greater diversity tend to exhibit better EBITDA margins over time and higher capital returns than those with less diverse teams. Diverse teams also exhibit stronger creative problem-solving skills, broader perspectives, and prove to be more innovative and resilient than homogenous teams.**
The good news is that private capital is paying attention to diversity more than ever before given market imperatives and notably, more inquiry from their institutional investors. Human capital partners (and their external advisors in leadership) are also an accelerant, cultivating more diverse pools of leaders and supporting those leaders towards better outcomes.
What initiatives are you taking to enhance the diversity of leadership in portfolio companies?
**https://www.bcg.com/publications/2023/how-leaders-can-improve-gender-diversity-in-private-equity
***https://www.bcg.com/publications/2024/diversity-in-private-investment
