Many factors contribute to the success of portfolio companies, from access to capital to their business models and customer base, but private equity firms are increasingly recognizing the element that may matter most: talent in the executive suite.
The traditional approach to accelerating portfolio company growth emphasized financial strategies, but today’s investors are more intent on choosing and nurturing the right people to lead. As a result, talent and the channels for attracting it are playing a greater role in private equity firms’ strategies.
“We believe it’s the primary differentiator,” says Amy Fields, vice president and chief human resources officer for investment firm HBM Holdings.
While she acknowledges that demand for a company’s product, a strong business model and effective use of technology are important, “we feel like talent is really what makes the difference.”
Elise Chowdhry, managing principal of Optimum Advisors, a consulting firm specializing in PE firms and their portfolios, agrees. PE firms “are much more focused on getting this piece of the equation right,” she says. “Research has shown that people are really the linchpin of organizational success.”
“Research has shown that people are really the linchpin of organizational success.”
‘Personality in the Right Place’
Talent has become a buzzword in business circles, but defining the term and deciding how to harness it are essential for taking growth companies to the next level.
“We think of talent as personality in the right place,” says Dave Winsborough, vice president of innovation for personality assessment firm Hogan, which emphasizes the importance of cultural fit. He says placing a person with appropriate characteristics into the right environment, while providing necessary support, will increase a business’s chances of success.
According to Optimum’s Chowdhry, qualities such as reliability and leadership are instrumental to the success of all CEOs. From there, strengths in specific areas, such as managing growth or guiding a business through a challenging time, can be identified and sought out according to a company’s particular needs.
For its software businesses, San Francisco-based private equity firm Alpine Investors looks for leaders with soft skills, such as perseverance, the ability to overcome obstacles, self-awareness and humility.
HBM Holdings, which invests in manufacturers, employs a four-pronged assessment tool to evaluate qualities of prospective general managers and CEOs: the capacity to be action-oriented, make complex decisions, manage ambiguity and build effective teams. In addition, it looks for candidates who display a strategic mindset, interpersonal savvy and emotional intelligence.
Despite the temptation to conflate demonstrated career advancement with strong leadership, the two do not always correlate, says Hogan’s Winsborough. Besides ambition, effective executives exhibit specific behaviors that aren’t necessarily found in everyone who has risen through the ranks.
“In our view, good CEOs—those who build and sustain winning enterprises—tend to be self-aware and humble, and more interested in their people than the firm being well-known,” he says.
The Talent Difference
Securing senior executives who fit the organization begins with building solutions for attracting and developing the C-suite. Increasingly, PE firms are using a combination of data analysis and in-person assessment tools to help identify and foster leaders for their portfolio companies.
Matt Moore, chief talent officer and chief of staff for Alpine Investors, explains that firms must be proactive in securing the right leaders. “We believe that we are in the talent business first and foremost,” he says. “This is a dramatic shift from the past.”
By using tools such as personality assessments, a private equity firm can take a sophisticated approach to hiring. A thorough analysis can help it identify the specific competencies that would define success for individual roles, and data about candidates can highlight behaviors and characteristics an individual might display under pressure.
Exhaustive efforts at talent selection are worthwhile. A strong leader can drive success; an ineffective one can negatively impact a company’s entire infrastructure.
“Most people have experienced and know the pain of a bad hire,” Chowdhry says. “Investors often start with the wrong CEO, and that can carry through the rest of the C-suite. It undermines morale, it undermines productivity. It can set investment back—sometimes by years—and ultimately result in a big hit to investment returns.”
Expanding the Pipeline
Cultivating strong leaders isn’t just for growth-stage companies or startups. Ongoing organizational assessments are helpful for improving productivity and success for mature companies as well, Chowdhry says.
“The returns are far greater for us when we really focus on hiring the right person.”
Chief Talent Officer & Chief of Staff
HBM, which is family-owned and so able to hold its investments for the long term, has created a talent-incubator program that develops CEOs and other top-level leaders.
It also has a team that provides day-to-day operational support, offering everything from oversight and advice on best practices, to leadership training and vendor support.
Through the program, the firm hires associates into a hybrid position focused on corporate development and internal projects. During two years acting as internal consultants, participants develop leadership skills and functional expertise before transitioning into a portfolio company in a fast-tracked general management role. The program uses a variety of methods to prepare its future leaders, including leadership training tailored to their individual development plans, team building, and broad-based, hands-on experience in all aspects of active acquisitions.
Alpine Investors is pursuing a similar talent acquisition strategy with a CEO-in-residence program, in which the firm recruits a CEO before it identifies a platform to buy. The program provides a new leader with the opportunity to participate in the due diligence process prior to the acquisition.
“We believe that having a great CEO to take over a company the moment we acquire it is instrumental in the overall success of an investment,” Moore says.
Both HBM and Alpine Investors partner with MBA programs to expand their talent pipelines. HBM also has used platforms such as LinkedIn and Twitter to build a presence at business schools and for connecting with proprietary deal-makers, according to Fields.
“Talent drives the ultimate return,” Moore says. “The returns are far greater for us when we really focus on hiring the right person.”
This story originally appeared in the May/June 2018 print edition of Middle Market Growth magazine. Read the full issue in the archive.
Chaunie Brusie is a writer and author from southeastern Michigan.