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How Private Equity Funds Can Nurture Better Leaders

Top private equity firms recognize that their best chance of success is to be thoughtful and decisive about deploying talent.

Von Hugh MacArthur, Dan Schwartz and Phil Kleweno

First published on April 05, 2018
Min. Lesezeit


This article originally appeared on Forbes.com It's axiomatic in private equity that great management teams can do great things. Portfolio company outperformance is strongly correlated with having the right team in place at the outset of ownership. Yet in our experience, PE firms struggle to make early, high-impact talent decisions, both in the C-suite and in other mission-critical roles. Hesitation can be a major source of value loss, as it too often results in unplanned replacements to course correct for suboptimal performance. PE investors tend to take an overly positive view of management teams early on in the investment process. When Bain & Company recently analyzed a set of troubled deals in which it had coinvested, it found that the pre-close view of management teams was strong, or at least passable, most of the time. This isn't unusual. Deal teams spend months courting company leaders through the due diligence and negotiation phases, a period that typically gives way to a post-close honeymoon, when funds might be inclined to give leaders a chance to prove themselves. This relationship is often central to the fund winning the deal, and it can be hard to pivot quickly from "wooing mode" to "operator mode" post-close. As discussed in Bain's recently released Global Private Equity Report 2018, however, top funds recognize that a much more proactive approach to talent is critical. Besides quickly ensuring strong leadership at the top, they've developed capabilities to define and fill the mission-critical roles throughout the organization that are essential to execution. Success depends on matching talent to the unique set of opportunities identified in each portfolio company's value-creation plan. There are typically five key elements of this process: Determining during due diligence the capabilities required for the organization to deliver on the investment thesis Defining the mission-critical roles and capabilities needed to execute on the plan, and identifying any holes in the organizational structure that require immediate change or enhancement Assessing the talent needed to win and identifying the right candidates, using traditional tools, advanced analytics or a combination of both Creating fast feedback loops to understand what is working and what still needs to be fixed Building a continuous learning platform by archiving and analyzing data for future talent decisions within the portfolio Value creation as the roadmap When it comes to creating value with a portfolio company, what worked in the past won't necessarily work in the future. Good leadership is situational. Strategy frequently shifts under PE ownership, and so do the capabilities required for success. What made for good management in the past may be less effective as the new strategy begins to unfold. Adopting this perspective shifts the central question in talent assessment from "Is this management team good enough?" to "Is this management team fit for our purpose?" Matching talent to the specific needs spelled out in the value-creation plan has to take place at all levels of the organization. Armed with the clearest possible view of the objectives, the PE firm can define roles that are critical to the mission, from the executive suite to the front line, and create a process for finding the right people to fill them. For obvious reasons, this begins at the top with the CEO. But it is also critical to define the C-suite roles carefully, so that they align with the company's new mission and strategy. And sponsors need to define the potentially game-changing set of mission-critical roles further down in the organization. These roles tend to be relatively small in number but outsized in their impact on value. The challenge is to identify them early in an investment cycle and fill them with high-impact, A-level talent. The good news is that it's becoming easier for PE firms to improve their success rates. Not only are they getting earlier access to management teams in due diligence, but they can also tap new sources of data and take advantage of digitally enhanced assessment techniques to gain better insights. Assessment specialists are increasingly attuned to the needs of PE investors and are becoming more sophisticated at analyzing the growing body of talent and organizational data. Matching these tools and techniques to the specific objectives laid out in the investment plan can result in faster and better talent decisions. Getting all this right requires continuous refinement. As the mission evolves and the balance shifts between quick-hit priorities and longer-term goals, staffing and assessment priorities will pivot as well. Regular check-ins at portfolio companies are essential, and it's important to broaden the firm's overall assessment capability by capturing and sharing what deal teams are learning about talent in each portfolio company. This involves developing a continuous learning platform, through which the firm gathers data on people and roles, stores it in a live archive and analyzes it strategically to make better talent decisions across the portfolio. At both the company and the firm level, the process is dynamic and dependent on continuous, broad-based learning. There is one constant, though: Top firms recognize that their best chance of success is to be thoughtful and decisive about deploying talent that is fit for purpose and ready to execute, at all levels of the organization. Hugh MacArthur, a Bain & Company partner based in Boston, is head of the firm's Global Private Equity practice. Dan Schwartz, a partner in Bain's Organization practice, is based in Washington, DC. Phil Kleweno is the managing partner of Bain's Washington, DC, office and a key member of the firm's Retail and Results Delivery® practices.

This article originally appeared on Forbes.com

It's axiomatic in private equity that great management teams can do great things. Portfolio company outperformance is strongly correlated with having the right team in place at the outset of ownership. Yet in our experience, PE firms struggle to make early, high-impact talent decisions, both in the C-suite and in other mission-critical roles. Hesitation can be a major source of value loss, as it too often results in unplanned replacements to course correct for suboptimal performance.

PE investors tend to take an overly positive view of management teams early on in the investment process. When Bain & Company recently analyzed a set of troubled deals in which it had coinvested, it found that the pre-close view of management teams was strong, or at least passable, most of the time. This isn't unusual. Deal teams spend months courting company leaders through the due diligence and negotiation phases, a period that typically gives way to a post-close honeymoon, when funds might be inclined to give leaders a chance to prove themselves. This relationship is often central to the fund winning the deal, and it can be hard to pivot quickly from "wooing mode" to "operator mode" post-close.

As discussed in Bain's recently released Global Private Equity Report 2018, however, top funds recognize that a much more proactive approach to talent is critical. Besides quickly ensuring strong leadership at the top, they've developed capabilities to define and fill the mission-critical roles throughout the organization that are essential to execution. Success depends on matching talent to the unique set of opportunities identified in each portfolio company's value-creation plan. There are typically five key elements of this process:

Determining during due diligence the capabilities required for the organization to deliver on the investment thesis
Defining the mission-critical roles and capabilities needed to execute on the plan, and identifying any holes in the organizational structure that require immediate change or enhancement
Assessing the talent needed to win and identifying the right candidates, using traditional tools, advanced analytics or a combination of both
Creating fast feedback loops to understand what is working and what still needs to be fixed
Building a continuous learning platform by archiving and analyzing data for future talent decisions within the portfolio

Value creation as the roadmap

When it comes to creating value with a portfolio company, what worked in the past won't necessarily work in the future. Good leadership is situational. Strategy frequently shifts under PE ownership, and so do the capabilities required for success. What made for good management in the past may be less effective as the new strategy begins to unfold.

Adopting this perspective shifts the central question in talent assessment from "Is this management team good enough?" to "Is this management team fit for our purpose?" Matching talent to the specific needs spelled out in the value-creation plan has to take place at all levels of the organization. Armed with the clearest possible view of the objectives, the PE firm can define roles that are critical to the mission, from the executive suite to the front line, and create a process for finding the right people to fill them.

For obvious reasons, this begins at the top with the CEO. But it is also critical to define the C-suite roles carefully, so that they align with the company's new mission and strategy. And sponsors need to define the potentially game-changing set of mission-critical roles further down in the organization. These roles tend to be relatively small in number but outsized in their impact on value. The challenge is to identify them early in an investment cycle and fill them with high-impact, A-level talent.

The good news is that it's becoming easier for PE firms to improve their success rates. Not only are they getting earlier access to management teams in due diligence, but they can also tap new sources of data and take advantage of digitally enhanced assessment techniques to gain better insights. Assessment specialists are increasingly attuned to the needs of PE investors and are becoming more sophisticated at analyzing the growing body of talent and organizational data. Matching these tools and techniques to the specific objectives laid out in the investment plan can result in faster and better talent decisions.

Getting all this right requires continuous refinement. As the mission evolves and the balance shifts between quick-hit priorities and longer-term goals, staffing and assessment priorities will pivot as well. Regular check-ins at portfolio companies are essential, and it's important to broaden the firm's overall assessment capability by capturing and sharing what deal teams are learning about talent in each portfolio company. This involves developing a continuous learning platform, through which the firm gathers data on people and roles, stores it in a live archive and analyzes it strategically to make better talent decisions across the portfolio.

At both the company and the firm level, the process is dynamic and dependent on continuous, broad-based learning. There is one constant, though: Top firms recognize that their best chance of success is to be thoughtful and decisive about deploying talent that is fit for purpose and ready to execute, at all levels of the organization.

Hugh MacArthur, a Bain & Company partner based in Boston, is head of the firm's Global Private Equity practice. Dan Schwartz, a partner in Bain's Organization practice, is based in Washington, DC. Phil Kleweno is the managing partner of Bain's Washington, DC, office and a key member of the firm's Retail and Results Delivery® practices.