Rethinking Value Creation in Private Equity: Three Imperatives to Operational Leadership in an Era of Disruption

Feb 23, 2024

Applied anthropologist and C-suite talent & leadership advisor, Cher Murphy, partners with pure-play executive search firm ON Partners and co-president, Matt Mooney, to shed light on three imperatives to address the changing landscape of private equity’s human capital strategy.


A recent Harvard Business Review article highlights private equity’s need for a talent strategy. While traditionally praised for their adeptness in driving value through financial engineering, the landscape of private equity has undergone a significant transformation: the focus on operational prowess is rising as the prominence of financial engineering diminishes.

This shift in focus aligns with the sentiments echoed by PE executives, who emphasize that leadership effectiveness stands as the foremost lever for value creation.

It’s no secret that private equity firms are navigating through an era defined by disruption, uncertainty, and evolving value paradigms.

Disruption, characterized by its multifaceted and unpredictable nature, poses formidable challenges, with 60% of business leaders finding it increasingly difficult to prioritize disruptive forces, according to a recent study by AlixPartners.

The rapid pace of change and disruptive influences compound the complexity of decision-making for PE investors and business leaders alike.

Decision-making in this complex landscape naturally amplifies the need for strategic alignment between business strategy and talent strategy. Such alignment not only drives organizational success but also mitigates risks associated with leadership transitions and talent management.

While there’s optimism that exits will start to see a rebound in 2024, the slowdown has created a shift in focus toward value creation across existing portfolios. This year, GPs will take a more hands-on approach according to a new study by AlphaSense.

As the conversation around leadership and talent management takes center stage in the evolving PE landscape, the question arises: How does PE address the need for a human capital strategy?


01: Leadership is more than just the individual.

 

At the heart of this discourse is a profound recognition: leadership is not merely the purview of individuals but an intricate interplay between organizational culture, strategy, and human dynamics.

“As an applied anthropologist, we study humans,” states Cher Murphy. “We study how humans interact, communicate, and evolve culturally.  Coming from that foundation, I’ve always looked at executive leadership as more than a few individuals driving strategy. Leadership is the intersection where organizations and individuals come together.”

“We see that the leadership agenda from the top isn’t cascading down,” continues Murphy. “The barrier is that leaders might create ideas and solutions from the executive team, but they’re not using all the resources of the team around them to solve in this current environment.”

Drawing from anthropological insights, Murphy emphasizes the need to widen the aperture of analysis, transcending the traditional focus on individual leaders to encompass the broader context of organizational design, communication, and culture change.

And, evolving talent strategies and management isn’t solely on the HR leader, but the entire executive team. ON Partners data indicates that CHRO tenure is declining across organizations year over year. The data illustrates that 25% of CHROs will stay in their role for 1-2 years and the average duration of CHRO tenure in 2023 was 2.5 years.

“We are in the age that the board has human capital metrics,” states Murphy. If portco’s are aiming for 2024 IPO’s, the SEC has proposed a Human Capital Management Disclosure slated for this spring.

“The board and the executive team are more than just the compensation committee,” continues Murphy. “If you’re an executive team leader, you have data from people analytics on talent management and human capital to make sound data-driven decisions on leadership and talent.   You must answer these questions from multiple stakeholders because we’re in a stakeholder environment now.”


02: Agility and talent development are not opposing forces.

 

“When you look at the economic cycle, it’s been up and to the right since 2009,” states Matt Mooney. “So, you’re talking 14-15 years of free money, no interest rates. It has created half a generation of investors, board members, and leaders who have never seen market adversity. And many are not sure where to start.”

Assessing talent strategically, not just during the hiring process but throughout their tenure, becomes crucial for private equity firms aiming to maximize the potential of their leadership teams. Murphy emphasizes the need for continued talent assessment and evolved talent development to unlock the full spectrum of capabilities within the organization.

When you place the CEO, their job is innovating and driving success in the next 3-5 years in that organization. Their role is beyond the daily activities in that organization today.  As a result, if you don’t have the right talent in the next levels aligned with the strategy and bringing complementary skills, you have a barrier to leadership.

That’s why talent assessment and leadership development are key.  It’s not just about assessing the talent when you choose new leaders, it’s about developing leaders as new skills and expertise will be needed for growth and surpassing unexpected challenges as a team.

“However, the pace of change poses a significant challenge. PE organizations will need to be highly adaptable and act quickly in fast-changing markets, especially in the areas of talent and leadership,” Murphy points out, highlighting the inherent tension between agility and traditional leadership development.

“What we need to be doing with a CEO and the executive team is helping them build the human capital strategy coming out of the business strategy before launching retained searches,” explains Murphy. “We look at what are the critical hires to meet OKRs, who is the critical talent to retain, what actions can organizations take now as we assess talent externally along with assessing existing talent internally.  Aligning the human capital strategy to the business strategy is often overlooked in portco’s.”


03: Trust is foundational for building human capital strategy.

 

Trust is the foundational element of effective leadership and organizational success. Trust forms the bedrock upon which collaborative relationships are forged, enabling teams to navigate complexity with agility and cohesion.

According to Deloitte’s 2024 Global Human Capital Trends, trust across the organization has potentially never been more important.  It is the key ingredient for companies to flourish, but for many organizations, how to build and sustain it has remained elusive.

As private equity firms operate within a high-pressure and time-sensitive environment, building trust becomes even more imperative.

Mooney emphasizes, “Private equity has a pressure and a timeline that you don’t get from public companies. There are all these factors coming in that if you don’t get talent strategy, executive talent, and leadership capability as a lever in this next period, you’re not guaranteed to have any type of returns or results that private equity has had.”

Mooney underscores the importance of trust in the context of hiring new executives onto a leadership team, onboarding them, and maintaining talent assessment across the C-suite. He points out, “If you’re going to spend all of this time and all of the financial resources, how do you make sure that they integrate?”

The statistics on executive onboarding further accentuate the significance of trust-building efforts, especially in the wake of the pandemic. With a notable increase in premature departures within the first 90 days, particularly among diverse leaders, investing in trust-building initiatives becomes paramount for private equity firms seeking sustainable talent retention and organizational success.

Trust is also important when it comes to third-party consultation to aid in building human capital strategy for PE-backed companies.

“If you’re a scaling organization or if you’re a PE organization that’s just realized your leadership capability or your talent strategy isn’t meeting all the needs that you have, then you’re going to want to partner with firms that understand speed, understand simplicity, and can tell you the truth,” states Mooney.

“As a pure-play executive search firm that specializes in PE executive hiring, we understand a piece of this need,” continues Mooney. “And we are honest enough with ourselves to know we shouldn’t be the whole talent strategy solution for our clients. That’s why we partner with advisors like Cher Murphy. Together, with our combined knowledge set, we embody real-world, practical applications of human capital strategy.”

Murphy adds “We all know that a trusted advisor relationship can be the catalyst to unprecedented results. PE firms previously focused on acquiring talent as the sole lever for value creation, in the human capital strategy. Executive teams and boards need to look at talent and leadership differently. Can they build a human capital strategy that aligns and drives their business strategy, and if not, where can they look for this partnership as talent continues to drive a competitive edge in PE?”


Cher Murphy, an applied anthropologist, and Marshall Goldsmith 100 executive coach, builds teams and coaches leaders across scaling portfolio companies for Venture Capital and Private Equity firms, as well as Fortune 100 and FTSE 100 organizations. Specializing in advising leaders navigating uncertainty and rapid change, Cher serves as a C-Suite Advisor on Talent, collaborating with CEOs, Executive Teams, and Boards to synchronize the people strategy with the business strategy. Learn more about Cher Murphy.

Matt Mooney, co-president of ON Partners, a pure-play retained executive search firm, is renowned for his expertise in constructing high-performing executive leadership teams. With a track record spanning over 400 placements in C-suite and board positions, Mooney has consistently propelled growth and facilitated transformative change across various organizations throughout his career. Learn more about ON Partners.

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