Human capital in private equity should not be overlooked. The economic value of an employee’s experience and skills can make a significant difference throughout the entire life cycle. Human capital may be harder to quantify than finance, operations, or strategy, but it is just as important to success.
Recent research from Spencer Stuart examined large private equity firms and mid-sized firms to understand how they utilize talent strategies. Below are some of the trends they uncovered.
Mid-cap private equity funds are making progress compared to mega funds.
Mid-sized firms are becoming more strategic with their talent initiatives, but are not yet on par with their larger counterparts. This could be due to a lack of resources or a lesser understanding of these types of programs.
One example from the research, “Mega funds are likelier to use third parties to conduct confidential referencing during the diligence phase to gain insights on a target company’s CEO/ management team; 69% of mega funds use this consistently, compared to 33% of mid-cap funds.”
Pre-deal moves are gaining traction.
The majority of private equity firms are testing pre-deal strategies to assess and address talent needs more quickly. One area where larger firms are outpacing mid-market firms is in pre-deal search. The practice is designed to reduce the investment risk and jump-start momentum.
According to Spencer Stuart, “We are seeing a rising number of firms using pre-deal search not only to identify CEO and C-suite candidates, but also experienced executives who can join boards, act as operating partners or serve as advisers to CEOs.” Also becoming more common are CEO assessments. CEO candidates are open to this as part of the diligence process.
Large firms target team and organizational effectiveness.
Nearly 75% of private equity firms have increased their focus on team and organizational excellence. Knowing that the skills and expertise needed will evolve, it’s essential to consider the value creation plan of portfolio companies from acquisition through to exit.
Annual management reviews are becoming more common.
As investments have underperformed in recent years, private equity firms are increasing the use of annual performance reviews for management teams, including the CEO. While a step in the right direction, there is no consistent approach to the process. The study found that firms with a transparent, thorough process can better ensure their executive teams are aligned and improve overall performance.
CEO succession planning takes center stage.
It is not uncommon for a CEO transition to occur during the private equity hold period, especially as this period is becoming longer. As a result, 50% of mid-sized firms are trialing CEO succession planning and leadership development for their internal talent.
The importance of talent in successful private equity deals has become clear to firms. Investing in talent acquisition and retention can deliver stronger long-term value.
Sheer Velocity is proud to be recognized once again by Hunt Scanlon as one of the 100 most prominent executive search firms serving the private equity sector. To learn more about how our executive search team helps private equity firms identify top talent, please send us a note.