Private Equity is Evolving - its Talent Strategy must too.

More competition, fewer deals, and a more challenging economic environment impact how private equity firms think about talent. Maintaining the same team structures, hierarchies, and competencies is unlikely to keep delivering the best results. It’s time for a more nuanced approach.

Private equity firms historically have a tried and tested approach to talent, which involves picking the brightest financial brains from the biggest names in banking and finance. The buoyant market up to 2022/23 meant a certain candidate profile tended to thrive, with a focus on structuring deals and maximising value through leverage and multiples. But, as the landscape and value creation levers have shifted, many are rethinking this approach.

Private equity firms are in a different world than ten, or even five, years ago. The number of funds has risen from 4,300 in 2010 to almost 12,000 in 2022 - a nearly threefold increase - pushing up competition, deal volumes, and dry power. Interest rates have risen, which has impacted valuations, inhibited deal flow, and limited the effectiveness of tried and tested value-creation levers.  Meanwhile, LP expectations for the asset class persist, pushing investors to reevaluate every aspect of their work.

Fund differentiation is vital

The need for fund differentiation has increased across the private equity lifecycle, from fundraising to securing the best deals and, most importantly, post-deal, to deliver outsized value.

Analysis by the LCap Group found that between 2008 and 2019, the combination of leverage and multiple expansion made up over 50% of value creation. Post-COVID that’s fallen to 39%, while the role of margin improvement has more than doubled to 22%, with the expectation it will reach 30% in the next couple of years.

“Firms are holding onto quality assets longer and doing more with them,” according to a senior value creation professional at a private equity firm investing in minority equity stakes. “In more challenging market conditions, we've had to become more hands-on to deliver value.”

Evolving value creation levers demand broader competencies

So, suddenly, alongside knowledge of financial engineering, private equity teams need broader expertise, spanning operations, M&A, technology, marketing strategy, employee engagement, and culture, both during the deal process and throughout the hold period. Plus, interfacing and collaborating with the management team is critical to drive these strategies forward.

“Value Creation professionals [at our firm] work hand-in-hand with the deal team, contributing to due diligence in assessing any potential new acquisition,” explains a private equity client of LCap. “Then we partner with the management team, working very closely with them on a 100-day plan, and long-term value creation plan.”

For investors, this has introduced a demand for a blend of talent that combines sector-agnostic consulting experience with situational management experience. This differs from traditional operating partner roles in private equity, which historically favoured seasoned C-suite operators to contribute in Non-Executive or Chairperson roles post-acquisition.

“Our value creation team combines key sector experience, a consulting background, and often entrepreneurial experience, enabling us to gain the trust and respect of management teams very quickly,” says a London-based Operating Partner with three decades of experience in Human Resources. “Plus, it gives us a bench of talent ready to step into interim positions as needed throughout the hold period.”

Introducing more granular talent assessments

Now investors are deliberately positioning themselves as part of the leadership team and driving value creation throughout the investment period, leadership assessments have a vital role to play, in evaluating how their team’s functional harmony, situational experience, and domain expertise align with the strategy and portfolio.

LCap’s behavioural assessment tool, PACE, introduces a transformative approach by enabling a comprehensive mapping of internal and portfolio teams, while simultaneously feeding into long-term talent strategies. In addition, our Leadership Dynamics tool can be used pre and post-acquisition to quantitatively assess management team competencies (domain, functional, situational) and alignment with the value creation plan.

“Stress-testing blended management team capabilities has become vital in more challenging periods,” according to one of LCap’s Operating Partner clients. “Market conditions have necessitated taking a much more analytical approach to assessing and building management teams than simply relying on experience and character trait preferences,” he continued. “We now can more concretely understand management skill gaps beyond functional requirements – like a new COO or CTO – identified by existing teams.”

A proactive approach to talent

Private equity firms are starting to apply the same analytical approach to their in-house capabilities. Our recent report on the behavioural archetypes of investment associates, directors, and partners in private equity revealed numerous insights on how behaviours shift as individuals move up the internal hierarchy. For example, as professionals progress from associate to partner level, we see a discernible shift from collaborative to more autonomous and vision-driven behaviours. By being mindful of these shifts, private equity firms can implement a talent strategy that better supports portfolio company transformation.

Furthermore, talent due diligence is becoming a key concern for LPs when looking at the sustainability and effectiveness that a GP can deliver, particularly in the case of a small or medium-sized firm that doesn’t have the manpower of a larger organisation (our research found that the median private equity firm size in Europe is 58). Data-led assessment can help to demonstrate that a private equity firm has future-proofed its talent.

An evolving private equity profile

Core private equity skills aren’t going anywhere but we will start to see more ‘hybrid’ investment talent, with a more varied profile and background. Meanwhile routes to progression within firms will also start to favour those with a more rounded skill set.

Those firms that adapt their hiring and development practices the fastest will reap the rewards in the next few years. As an investor noted recently: “We are seeing the emergence of two types of funds: those capable of raising funds and those not”. Talent could be the key difference.

If you would like to discuss the talent needs of your private equity business and the role that people analytics can play, then get in touch at contact@thelcapgroup.com