Private equity counselor with a proven track record in executive search. Partner & COO at Renovata.
Private equity (PE) investors generally seek acquisitions that will yield a high return in a tight four- to five-year time horizon. Most PE firms evaluate potential acquisition targets across a wide range of criteria including earnings before interest, taxes, depreciation and appreciation (EBITDA) as the primary indicator for potential.
Post-acquisition, attention quickly shifts to human capital as the driver of value creation. Often, the post-acquisition C-suite leadership changes as soon as a new platform deal is consummated. But by then, many find that it is too late.
Expediting The Process
In my experience, time is of the essence when it comes to the critical matter of getting the right executive into the right C-suite role in order to realize the optimized value of a portfolio company. I have yet to meet any private equity professional who denies this.
To note, C-suite executive search mandates—particularly for PE-experienced talent—regularly take three to six months. The new board is usually nine months to one year into a projected five-year hold period before the new leader is able to start their new role. The executive is very likely to make additional organizational changes and management upgrades, which in turn, pushes the new team’s overall effectiveness further out.
As much as PE firms are in the business of selecting the right companies through which to drive returns, they are also in the human capital business to identify the right leadership to make creating that value possible. In an increasingly talent-challenged landscape, I believe that PE firms need to start seeking leaders to run their portfolio companies at the time they are assessing and conducting the diligence of the asset.
How To Optimize Human Capital In PE
For example, the PE deal team, whether it is during early to late stage diligence on the target asset, should be assessing the talent needed to lead the company during post-acquisition.
A Rolling Start
This is the time to determine if you require a new CEO, CFO or other leadership changes to drive the new thesis forward. Specifically, with a thesis in mind, the deal team should already know whether this is a founder-replacement strategy and if the plan requires a different type of skill set. For me, then, this begs the question: Why the delay to green light leadership change? Adopting a proactive approach, such as implementing a “rolling start” executive search, would enable the identification of C-suite leaders or board members in waiting, thereby optimizing the time leading up to the deal closure.
To take it a step further, this rolling start period could occur at the portfolio company level as well. This entails the board hiring a new CEO, followed by a transitional period during which the incumbent CEO transitions out. This interim phase allows for a smooth and seamless transition of leadership, ensuring that the new CEO can effectively take charge of the company’s operations.
During this period, be it several weeks or a few months, the incoming CEO, having completed their diligence during the interview process, will know whether they need a new CFO or CRO. Rather than wait until the formal day one of their new role, the CEOs who kick off the typical three-month process for direct report upgrades will be better armed with the right team sooner versus later.
Optimizing the human capital strategy and cascading talent decisions far earlier in the overall lifecycle of the deal benefits future owners as well as operators who are tasked to drive the business. In a time-intensive period in private equity, you can create the right team to hit the ground running and drive change on the value creation plan. The ideal scenario is to have the PE owner’s new CEO in the seat at the time of deal consummation or perhaps a part of the diligence advisory team during the pursuit and diligence phase. Therefore, this executive understands the domain and the problem statement of the target asset long before the clock starts ticking.
Great teams led by strong leaders who know how to inspire and drive high performance are the ones who create value for any private equity firm’s portfolio companies. It’s time to move the human capital evaluation and search kick-off process earlier in the deal flow and measure it equally with EBIDTA. Otherwise, I see the promise of strong EBITDA forecasts becoming a fading memory in light of actual performance.
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