Technology is taking over the world, and most industries see the value of digital transformation. In the past decade, innovations from companies like Google and Amazon have radically changed the ways we work, making it impossible to ignore technology’s powerful impact on operations. Private equity firms have taken full note of these big shifts and potential payoffs.
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Investments in digital can help private equity firms increase the velocity of value creation. Technology can indeed improve a wide range of portfolio performance measures, from driving productivity to automating processes to strengthening market position — all of which can lead to higher returns.
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It’s easy for operating partners to become so fixated on processes and technology that they overlook the most important lever: the people and teams who make transformation happen.
Private Equity Firms Buying Into the Talent Transformation
Processes and technology are nothing without the right talent to implement them. For every business transformation, there is a great team of people who made it possible. This is likely why private equity firms are placing increased value on conducting due diligence on a target company’s leadership team — in addition to investigations into financial, operational, IT, and other major value drivers. On top of that, more PE firms are hiring highly experienced talent acquisition professionals to manage the critical talent agenda, culture, and leadership pieces that enable successful portfolio transformations.
Recently, I worked with a PE-backed company that successfully exited in one year. Even though it was only in year one of a three-year transformation, the acquirer was so impressed with the executive leadership team and strategic business plan that it purchased the company for a high multiple right then and there.
A company’s financials and technological capabilities are still important. However, private equity firms are beginning to see significantly higher valuations occur as a result of senior leadership’s competence, decision-making, and transformational skills. Human capital is the critical component companies should seek — both before and after making a deal.
Distinguishing Transformers From Maintainers
Finding the right people to drive a portfolio transformation can be a huge challenge because it can be difficult to discern which traits will move the needle for your business. Nevertheless, a common characteristic of people who thrive amid rapid change is the ability to persevere, even when overwhelmed and overloaded. These people, whom we call transformers, are persistent enough to see the light at the end of the tunnel while keeping projects advancing until they come together.
In addition to endurance, transformers possess a keen sense of urgency. They realize that one day — or one hour — can mean the difference between success and failure. They recognize that time is of the essence and can identify a problem before it becomes a serious issue. Without direction or guidance, they take it upon themselves to make a decision with conviction, design a solution, and implement it quickly.
Transformers, especially those in private equity, also have a high level of transparency. When you change something dramatically, there is always a bigger team attached. Week to week, you need to be transparent with the team about what is and is not working — and have the courage to speak up about it. Setting clear expectations and encouraging your team to participate in the ideation and problem-solving stages along the journey is a great way to maintain morale on the battlefield.
Beyond that, transformers think differently about building teams. Private equity requires high-performing teams, which results in extreme contributions. One person might be able to tackle a project in a fast and furious manner, but another team member may be more methodical. Not everyone on the team is likely to have a well-rounded set of skills. The best leaders know how to put those puzzle pieces together to redesign the business instead of developing the same strengths in everyone.
On the opposite end of this talent spectrum are what we call maintainers. Maintainers generally feel most comfortable with the status quo. They push toward harmony, incremental change, and choices that are less disruptive. They are your steady hands at the wheel, which has an important place in business. If you want incremental growth or modest improvement, maintainers are good options.
Maintainers can lead a team to success, of course. They understand how to navigate a ship, but they don’t necessarily know how to venture into uncharted waters that require fast decision-making amid chaos. If you’re hoping to grow or transform your portfolio company exponentially, adding extreme transformers to your leadership team is the better option.
Private Equity Firms Recruiting And Retaining Transformers
Given the importance of transformers, it’s natural to wonder how a private equity firm can identify and assess candidates and retain employees who have the potential to unlock a company’s value. The following strategies are the best places to start:
- Ask for solutions.
Many of the more conventional interview questions are obsolete. How well can you actually get to know someone — in depth — by asking questions like these:
- Do you consider yourself persistent?
- How well do you work under pressure?
- What is your greatest achievement?
These questions only scratch the surface of candidates’ experiences and expertise. To go deeper, tie questions to actual problems new hires will encounter on the job and ask how they would solve them. Ask questions about situational scenarios, such as:
- Give me an example of a painful business scenario when you could not see the light yet you endured through it. How did you persevere?
- Think of a time when you were under tremendous pressure on the job. How were you able to stay grounded, composed, and make fast decisions?
- Do you remember a time when you set an extremely difficult goal? Take me through how you accomplished it and transformed the status quo.
Questions like these can reveal how candidates think and shed light on their problem-solving skills, endurance, and behaviors. Posing behavioral or situational questions can give you a glimpse into their innate temperament and whether they align with the attributes necessary to drive change.
- Add rigor to the interview process.
Much has been said about that “gut feeling” when choosing one candidate over another. However, going with your gut only works about 50% of the time in hiring decisions. A much better option is to evaluate all candidates specifically and consistently using an agreed-upon scorecard.
Deeply assess candidates and apply analysis to their backgrounds. You can evaluate your candidate slate more objectively if you’ve first defined the mission, outcomes, and competencies required for success. If you find an applicant who has the right mix of skills but may need some help along the way in other areas, you can have a meaningful conversation about how existing team members will fill any skill gaps.
Maybe this person could be a successful chief revenue officer and a great relationship builder, but he or she might be less technologically savvy. You can have discussions about what assistance or support you can put around this person — such as a terrific chief information officer or revenue operational talent — so his or her strengths outweigh those weaker areas.
- Hire an executive coach.
Coaches are making a comeback. What was once seen as a weakness has become empowering. A coach can empower leaders to play to extreme strengths while neutralizing weaker skills.
In operationally driven PE firms, for example, we frequently see “bull in a china shop” performance. This is where a coach can be beneficial, guiding OPs on when to take the long view or deploy soft skills like listening, patience, empathy, and trust-building with portfolio leadership.
Every dollar spent on executive coaching adds about $7 of value to an employee’s worth. But coaching doesn’t just “fix” what might be lacking. It can help new hires leverage strengths that they might be underestimating. It can also help employees see the real value of their capabilities.
People, not processes and technology, will always be a company’s greatest asset — especially during times of change. With digital becoming a greater part of PE firms’ playbooks, it is imperative to build a game-changing team that will unlock real potential. To do that, place a great deal of attention on your recruitment process. After all, that’s how you’ll be able to screen out maintainers and screen in those all-important transformers who make change happen.