Human Capital Planning and Private Equity

Matthew Davis discusses the benefits of well-planned investment in human capital

Key Takeaways

  • Savvy investors recognise the importance of having an effective leadership team in place for portfolio companies.
  • Key skills are scarce and often mobile and need to be secured early in the deal process.
  • Portfolio investments and Private Equity (PE) houses may lack human resources leadership resource or expertise.
  • Owner managers and PE investors need the right team in place at the right time to maximise the value creation process.
  • Measurement of human capital should be a priority alongside having a strong EBITDA.
The quality of talent can make or break a portfolio investment, yet many Private Equity (PE) firms often struggle or lack the resources to adequately carry out human capital planning and assessment.  This is despite a trend for many PE firms to be active in the day-to-day management of their portfolio businesses. 
Portfolio investments in the mid-market are often owner manager led and have few, if any, talent management strategies or practices in place. They are vulnerable to performance management issues and loosing key talent easily. McKinsey Consultants termed this as being, “The War for Talent” because great leaders and talent are mobile and in short supply. Yet, many PE firms themselves place talent management lowly in their priorities for their portfolio investments and lack the resources to help the owner manager to develop their talent capabilities.
The skills many larger firms enjoy around human resources management and strategic leadership are increasingly needed for all organisations in today’s environment. Line managers and leaders may lack the skill or resource to adequately plan for pre and post deal human resources issues such as executive recruitment, assessment of capability and potential, succession planning, cultural alignment, and proper human resources management practices. 

Moving Human Capital Planning up the agenda

Time is of the essence when it comes to getting human capital planning right. In particular, finding the right executive who can deliver value early in the investment process is critical.  

Recruitment and selection activities take time to come to fruition but at the same time, the opportunity cost of failed hires and vacant positions is substantial. 

High performance, therefore, takes longer to achieve, costing the business valuable resources and costs as well as lost value creation.


The solution is to assess the quality of the leadership team pre acquisition and to carry out human capital planning as the earliest opportunity through a management due diligence process, so the PE investor has a clear idea of the actions needed to ensure an optimum leadership team is in place. 

Getting a running start pre acquisition also allows the PE investor to move more quickly to ensure the right leaders are in place and that red flags are identified at the earliest opportunity. 

Whether this involves recruitment of a new CEO or CFO and a managed transition from the old team or whether a development plan need putting in place to develop existing leaders.


Value creation

Taking too long to ensure the right team is in place in the portfolio company is expensive and avoidable if an effective human capital planning /management due diligence process is carried out pre acquisition.

Great teams led by effective leaders with the right skills mix, who know how to inspire and drive high performance are the ones who create value for any private equity firm’s portfolio companies. 

It is time to move the human capital evaluation kick-off process earlier in the deal flow and measure it equally with EBIDTA. Otherwise, the promise of strong EBITDA forecasts becoming a fading memory in light of actual performance.

Every organisation is unique and poses different risks

Every organisation is unique so having a valuable human capital plan and report in place is critical for all portfolio investments as one size does not fit all. 

Typically, questions around how the leadership team will manage the scale up of the business and build high performance working produce different answers for each business. 

Therefore, pre and post deal HR practices need to reflect the unique culture of the organisation.

Human capital planning also identifies organisational risks and threats that are unique to each organisation, whether the risks are reputational or behavioural in nature.

How MDC Advisory can help

  1. Pre-deal management due diligence and human capital planning to gain a critical insight into the effectiveness, motivation and ability of the executive and board teams as well as organisational strengths and red flags. This helps identify skills gaps, motivational concerns, and cultural misalignment.
  2. Post-deal leadership alignment and succession planning activities as well as organisational redesign and restructuring which can lead on to leadership development and Gap analysis to understand the post deal human capital planning landscape.
  3. Portfolio support This usually includes assessment for hires, leadership assessment and development often using 360-degree feedback, ongoing organisational reviews, and exit/further investment support.

About The Author

Matthew Davis leads MDC Advisory, a full-service business Psychology and leadership consulting practice.  

He has over 30 years’ experience of advising clients on all aspects of effective selection having advised clients globally.

He can be contacted via email or on 07974 430021


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