Private equity isn’t prioritising the leadership conversation.

Data can help

By: Ruby Sheera

13/09/2022

3mins


Leadership is an increasingly important value creation lever for PE-backed businesses. Yet investment directors have historically shied away from conversations about leadership suitability and dynamics, due to the subjectivity of people decisions, and the sensitivity of making change at the top. Now, advanced people analytics are helping to highlight leadership alignment at deal stage, sparking the conversations that might otherwise never happen.

Private equity firms talk a lot about the importance of management teams in driving value creation, but this talk doesn’t always translate into action. A survey by Bain & Co found that, amongst fund leaders, management team was named as the most important factor in a deal’s success, and the second biggest cause of failure in an exit. Yet still less than 1% of fees across deals are being allocated to leadership diligence. Why this disconnect?  

Sidestepping difficult conversations

PE dealmakers can be incredibly focused when it comes to buying, building, and selling on businesses. But while investment directors will leave no stone unturned when it comes to the finances, processes, and systems of a potential acquisition, they can be uncharacteristically restrained when it comes to assessing and making changes to the executive team.

Having conversations about people isn’t easy. Firstly, people decisions are historically very subjective, with little hard data to work with; something that doesn’t sit well with the highly analytical, fact-driven individuals who lead private equity deals.

And secondly, private equity firms are in the unenviable position of trying to do business with the very people that they may want to replace. You don’t want to scupper a deal by telling members of the leadership team that they going to lose their jobs. But you also need to be transparent and ready to make changes as soon as the transaction goes through. It’s a tricky balance to strike.

Nonetheless, shying away from these conversations – or kicking the can down the road - can have significant and expensive consequences. PE is all about driving value quickly, and this won’t happen without the right leadership team in place.

Our Leadership Insights Report found that the best performing businesses are more likely to make leadership change, make more change, and make change sooner. If the CEO, chairman and investment director don’t have the leadership conversation at the outset, they’re losing 12+ months in implementing their growth plans.

Starting conversations through data

Data is often portrayed as a negative when used to talk about people decisions, due to its capacity to depersonalise and automate, removing any room for grey areas. But what I love about leadership analytics tools in a private equity environment isn’t that they tell investment directors and company leaders what is right or wrong, but that they are tool for driving these vital people conversations early on in the deal process. They hold up a mirror to the Chairman, CEO, and investment director, and stimulate a discussion, which frequently wouldn’t otherwise happen.

Financial data holds a lot of power, but it isn’t the sole source of sound analysis. People analytics are becoming increasingly effective in giving investment teams a wider range of data to draw on, to make sound decisions regarding future business success. These include looking at the functional experience of the leadership team, alongside domain experience, and crucially, situational experience, to identify candidates who have overcome similar challenges before.

Assessing these different competencies enables investors to evaluate how current leaders align with the value creation plan, and then optimise leadership capital for the new direction of the company. Quantifying leadership in this way removes any subjectivity and sensitivity around the process, giving all sides the freedom to have an impartial conversation. So, they can come to a decision about the best way forward, not only for the business, but also for individuals, ensuring that they can fulfil their own career ambitions in a role that best suits their experience and expertise.

We find that far from dehumanizing leadership decisions; the right data can make the process more positive for all concerned. By giving investors and companies the tools, the facts, and the words, to eliminate awkwardness, and empower them to have the conversations that matter.  

Latest insights & impact pieces