Most of us would agree that people are our greatest asset. As automation, technology, and AI/ML improve, human roles have become more strategic, making people more important than ever. And this is even more critical for C-suite roles, especially in the Private Equity (PE) sector.
Successful PE investments rely highly on the leadership team, the business culture they’ve created, and knowing if the team they have in place is the right team moving forward. One way to determine this is for the PE firm to invest in a Chief Performance Officer (CPO), sometimes called a Human Capital Operating Partner.
According to McKinsey, CPOs are not yet as prevalent in the PE space as they should be, and it’s potentially a lost opportunity. Their contribution to due diligence and investment thesis includes:
- They assess whether C-suite leaders have the capabilities to deliver on the deal thesis, as well as whether the workforce has the scale or depth of skill required.
- They identify cultural issues that could provoke problems, such as a talent exodus or work slowdown, and flag inefficiencies throughout the organizational structure.
- They are experts in organizational change, deploying people analytics that makes understanding talent as data-driven as any other business metric and creating collaborative networks of chief human resources officers (CHROs) across a firm’s portfolio companies.
According to one of the CPOs McKinsey spoke with, “Being a good CPO requires you make the CEO happy, keep the deal partner informed, and be an expert, all while engaging your sense of diplomacy rather than offering critiques.” CPOs are active throughout the PE deal cycle and have several roles during the process. McKinsey outlines five of the roles.
Due Diligence Adviser
CPOs analyze a target company’s talent level and organizational health before an acquisition. Understanding the level of the current management team is critical before a PE firm’s investment. According to one partner at a PE firm, “It’s hard for my partners to want to make an investment if there isn’t a strong management team in the beginning. If I have to [completely change] a management team, then that means I didn’t do my work during due diligence.”
Post-Close CEO Whisperer
Once the deal is closed, CPOs initiate and monitor the organization’s effectiveness initiatives. This requires a healthy relationship with the CEO and executive leaders, including coaching and counseling them to learn organizational matters.
CPOs also monitor the progress executives make toward goals through tools like scorecards as part of the performance evaluations or hiring process. The hiring aspect of the role is why some CPOs are hired from executive search firms. These CPOs have a rolodex of relationships with C-suite candidates, including CEOs, CFOs, COOs, CIOs, and CMOs.
One of the more challenging roles a CPO plays is as a strategic guide using data and analytics to implement performance improvements and change initiatives. This includes change management initiatives, improving organizational alignment, and increasing the quality of the leadership team.
Leader for Portfolio Companies’ CHROs
The CPO also represents the voice of the PE firm’s portfolio company’s CHROs. The ability to address talent and workplace issues and foster a strong culture is essential. Whether bringing in experts, providing best practices, or pulling together roundtables, building relationships for the CHROs builds comradery.
So what skills does a CPO need? According to McKinsey, there are six traits to consider.
- The investor mindset – CPOs should have a “nose for value,” which means they should consider how the portfolio company can grow and marshal resources. In essence, be unsentimental, focusing on investor returns and business performance.
- Diplomatic prowess – CPOs must be able to engage with deal teams and portfolio executive teams. This is a tricky balancing act. As the article points out, CPOs must be able to serve as “strategic advisers, leadership coaches, key business-decision influencers, thought partners, and cooperative skeptics for multiple CEOs, management teams, and the investment team.”
- A metabolic rate geared to PE – The willingness to roll up their sleeves to get work done and the ability to pivot quickly, determine key priorities, and act decisively are hallmarks of a CPO. This requires someone with discipline, creativity, and lateral thinking.
- Exceptional interpersonal skills – Working closely with CEOs and other executives requires a high level of trust and confidence. As the article notes, “They should be prepared to take unpopular stands while demonstrating low ego, strong communication skills, and flexibility. Most of all, they should always offer solutions. This is especially important for identifying and recommending performance improvements to critical strategic, operational, and organizational areas.”
- High emotional intelligence – As mentioned above, with diplomacy, soft skills are necessary for CPOs to be successful. They should be able to see and assess the organizational dynamics and understand when they should raise a red flag or initiate a difficult conversation.
As you can imagine, finding someone with these skills that is able to fill all of the roles outlined is a hard task. Experience leading transformation efforts (not just academic or theoretical knowledge) and the ability to gain the trust of C-suite leaders is a rare mix of talent and experience. Typically the candidates come from one of three backgrounds: organizational psychologists, executive search professionals, or relevant private company experience.
CPOs with organizational psychology experience tend to deeply understand organizational design and company health, including C-suite dynamics and company culture. CPOs with relevant private company experience likely have a management consulting or PE firm background. Since they have done much of the work before, they have most of the skills outlined and can integrate quickly.
CPOs from an executive search firm have a network of trusted top talent and an understanding of navigating the C-suite to get results. Here at Sheer Velocity, we have worked with lower/middle market PE firms for years and have a vast database of senior HR leaders, including those with backgrounds in organizational psychology and those in the PE space who have previously led the people function in portfolio companies.
If you’d like to learn more about the role of the CPO at a private equity firm or you’re interested in hiring a CPO to maximize your investments and give you an edge over other PE firms that haven’t yet seen the need to hire for the role, send us a note.