The starting point for these comments is to acknowledge that many Private Equity (PE) investors can make good judgements about the leaders they want to drive their investment forward to a successful exit.
However, many cannot and much of the evidence suggests that soft skill reviews are typically not done as well as the legal and financial due diligence. The paradox here being that these often underpin disappointment at some point throughout the exit journey.
Management due diligence and human capital planning takes wide and varied forms from its presence (or not) in risk audits through to the evaluation of HR systems and processes (if any exist), attitudes, culture and the quality of key people and leaders.
As suggested above, in defence of the PE industry, one has to acknowledge to ever-present pressures of time, the prioritisation of other core issues above people and the many instances where PE investors have indeed been good judges of people and in particular the leaders with whom they are about to engage.
Like much of life (and due diligence) there is a need to drill down to specific and often the details are important (and where the devil in the detail lie). PE firms vary in how they do it, but all agree that the executive team business leaders needs to be right. The prevailing approach of the CEO and executive peers, stylistic traits flavouring how the business runs, attitudinal, morale and cultural factors that can facilitate or hinder the value creation plan, are all included.
A key point for PE investors to note is that the personality traits for growth in a conventional large plc for example mirror but the PE portfolio traits in terms of labelling, but their contents are different in practice as one might expect in PE scenario. Here are some recurrent personality traits and behavioural trends we have seen in portfolio leaders:
Applying the right mindset of thinking and decisions making
- An ability to drill into detail but see the wider view and think strategically especially on the front the of creativity and origination (many are better at the subsequent stages of evaluation and implementation).
- The ability to see patterns both in the business and externally in the market customers and competition.
- Making evidence-based decisions and adopting a “lessons learnt” response to mistakes (rather than blame).
Getting things done at pace and in the right way
- Having the energy to invest in the business after initial PE investment and stamina to see it through to exit. Motivationally, the energy needs to be directed towards growth (rather than elsewhere).
- Adopting and demonstrating a sense of urgency. “Deeds not words” is the point here.
Challenging the status quo
- A preparedness to accept that the structures, process etc., to get the business to the point of PE investment will not be the same going forward to successful exist.
- Knowing how to develop the processes and systems relative to the stage and future needs of the business.
- Having experienced and driven organic growth (rather than growth through other means).
Getting the people issues right
- Knowing how to develop key people but also teams collectively.
- Being attuned to the cultural aspects of the business especially those that embrace (or could inhibit) change.
- Demonstrating a default of change-oriented thinking focussing how change is driven and not just the results.
Some of this can be measured through conventional interviewing, and reputational and reference checking as factors like experience in working in a PE owned situation. Many cannot but methods and tools do exist that can play a key role.
Of the range of factors cited above from culture and behaviours through to leadership personality traits, there are methods for investigating and benchmarking data. There is also a range of factors we have seen that PE investors need to be mindful of when conducting “soft” management due diligence.
- A well-established area is leadership assessment. This has a long history in HR and applied to selection and development both in individuals and teams. Here is not the place to go into the detail and there is plenty of advice around assessment here.
- Define the criteria and benchmarks clearly, with the comments above in mind about how many of the traits defined in conventional corporate situation have a different meaning in a PE context.
- Weight the criteria and benchmarks. Some are more important than others. Some might increase in importance and others decline.
- Use methods to help confirm impressions derived through the financial, legal due diligence and conventional checks, discussion processes etc., and especially to nudge views of talent characteristics where evidence leads to conflicting conclusions.
- Validate the conclusions over time by conducting timely formal review across the years to exit.
About The Author
Dr. Steve Sloan is an acknowledged leadership expert and consultant who has over 20 years’ experience advising clients globally.
He can be contacted via email or by calling 07974 430021
