Protecting Private Equity’s Best Investment: Talent

Private equity funds are prioritizing talent amid the pressure of increased investor expectations, coupled with tightening regulations and a highly competitive market. Over the past 20 years, the number of publicly traded firms had declined from 7,500 to only 3,800 today, according to data from the RBL Group as reported in the Harvard Business Review. In wake of that drop, private equity firms have gained new influence.

Firms are now embracing a non-traditional model of “portfolio transformation,” which requires a commitment to strategy and operational excellence. Fund members are allocating resources toward engaging and developing talent more effectively than ever. The reasons behind this are twofold: First, by broadening their bases of talent to include a wider spectrum of experts, from investment bankers to executives and beyond, firms can strengthen their decision-making, and they can also improve management of portfolio companies.

While exceptional talent has always been a feather in the cap of the private equity industry, the renewed emphasis on it is, in part, a reaction to today’s sky-high prices for assets. Now, instead of chasing returns through dealmaking, firms are focusing on increasing revenues from portfolio companies. However, firms often tap their champion dealmakers to serve as board members or leaders of acquired companies, and they may not have the appropriate skill set to turn around a company. With the enormous cost of acquisitions, therefore, the need to improve the talent pool that can manage existing companies is obvious.

One major challenge for CFOs and fund managers is employee retention, according to NES Financial. This stems from an overall shortage in talent caused by demand for employees versed in a wide variety of new capabilities. Expenses associated with training new talent are often substantial, as private equity companies are known to pour a large portion of time and resources into cultivating productive, highly skilled workers.

To guide private equity funds in the areas of talent and leadership development, according to the Harvard Business Review, RBL states that over half of firms have introduced a new position: leadership capital partner, or LPC. The LPC is responsible for establishing a common culture among portfolio companies and may take part in hiring those companies’ human resources leaders. LPCs often play a key role in the vetting process for HR officers.

Annual councils—in which ideas, tools, and best practices are shared among chief human resources officers—are often headed by LPCs, who may have the final say as to which tools and systems portfolio companies should use. In addition, LPCs are tasked with presenting any talent-related findings during divestiture negotiations; for example, they might use data from annual leadership and culture audits to show proof of improvement and win buyers’ confidence.