Leadership diligence: Are you leveraging the potential of pre-deal evaluation? Next-gen leadership diligence gives investors an edge

Leadership diligence can make the difference between a good and bad investment in private equity. This has never been more so than in the current market, when the bar for investments has moved even higher, and value creation increasingly relies on a management team’s ability to drive revenues and margins over the hold period. Yet, despite its importance, leadership teams are still one of the least understood and most inconsistent aspects of due diligence.

Without access to management, private equity firms currently rely on a combination of covert referencing and leveraging the instinct and experience of investors to aid decision-making. However, as most investors would admit, these approaches have their disadvantages, being highly subjective and focusing on leaders in isolation when research and experience show that it is teams, not individual leaders, that drive great outcomes.

For those who do want to dig deeper, historically the options have been limited to personality or psychometric tests, requiring access to the management team which isn’t always possible at particular points of the deal cycle. The industry has been crying out for a method of leadership assessment that spans the two, being both discreet and providing deep, objective insights.

A more intelligent approach

Leadership Dynamics was conceived and built to solve exactly this challenge, underpinned by the largest study of leadership in private equity-backed businesses globally. By analysing over 30,000 private equity transactions in the UK and Europe since 2010 and mapping the teams behind each transaction - equivalent to over 150,000 executives - we can pinpoint the DNA behind upper-quartile performance, across a variety of variables, such as sectors, business size, or value creation plan.

These insights are invaluable for investors in pre-deal scenarios, enabling them to benchmark target leadership teams against top-performing businesses within their peer group, or that have been on a similar value-creation journey. For example, what does the balance of functional, domain, and situational competencies look like across the team? How can you optimise the team post-deal and phase leadership changes throughout the hold period?

What do we need to evaluate a leadership team pre-deal?

Simply provide details of the target company, current C-suite, value creation plan, and growth objectives, and Leadership Dynamics provides an arms-length review of the leadership team, with no management access required. Answering questions such as: Does the current team have the capability to deliver the plan and growth required? Where are the gaps, and how can these be addressed within the first 100 days post-deal? And how does the team compare with previously successful teams?

We will highlight individual and team strengths and areas for improvement based on biographies, company data analysis, along with behavioural projections. We will also benchmark the team against a competitive peer group whose path they aspire to follow and provide a snapshot of how well the team is prepared for the growth journey. Finally, we can help to develop a post-deal optimisation plan or provide insights to inform the desired profiles of additional or new leadership team members.

Investors meticulously analyse data for every aspect of a potential investment, so why should the leadership team be any different?

If you're interested in learning more about how data-driven leadership diligence is transforming pre- and post-deal evaluations, please email me on Mathew.Cuthbertson@thelcapgroup.com