The early 21st century introduced a shift in the world of private equity buyouts. With the collapse of Lehman Brothers in 2008 and the subsequent recession, the private equity landscape has become more regulated, transparent, and demandingª. A combination of this—as well as the shift from an industrialized society to an information or knowledge-based economy where creativity and innovation are not only prized, but required—has driven the need for the softer skills of leadership, passion, mentorship, and interpersonal relations among those involved in private equity buyouts.
According to a recent research study by the University College of London and Mercuri Urval International, organizations “spend too little time on people issues compared to the amount of time” spent on numbers. Considering that 70%-80% of highest-risk, highest visibility projects fail at the execution level, it is imperative that those implementing change have the requisite skills required for transformational and organizational successº. In this new age, the private equity firms that focus on the human factor in buyouts will be the winners.
Attending to the human element to any project or situation is always tricky because humans are—for a lack of a better term—human. And the newer, “softer” people skills are often more difficult to quantify. A recent joint research study by University College London and Mercuri Urval International, “Managing private buyouts – Cracking the human elements,” found that there are six key trends in understanding the growing importance of the human factor in private equity buyouts.
#1 A Young Industry Is Maturing
The origin of the private equity buyout industry can be traced back to the post World War II era, although the industry really took root and grew during the economic growth of the 1980’sª. Since then, the industry has grown and matured in a relatively short period of time, and the image of bottom line boardroom deals and laid-off workers is not necessarily one that attracts people with “softer” skills. Is it possible that the private equity sector just hasn’t existed long enough for the public to fully understand the ins-and-outs of the industry? Has the public had enough time to overlook the cutthroat days of the 90’s and early 2000’s? Luckily, with the industry maturing, there is a chance to reshape this image and hopefully attract more qualified professionalsª who are willing to look beyond the numbers and more into the human factors that are critical to success.
#2 Excellent Players Must Stand Out
Private equity buyouts have been perceived as ‘cutthroat’ due to the relentless focus on the bottom line, which often resulted in cost-cutting and significant downsizing, as portrayed in the film “Up in the Air.”
However, in order to succeed in this brave new world order of people skills, positive culture, and information, those organizations wanting to survive must make hiring decisions based on new criteria. Failure rates of 70%-80%º and cultural differences that either slow down or derail buyouts are proof that cost cutting is no longer enough. One needs to look no further than the mergers of AOL/Time Warner, Sprint/Nextel, and Daimler/Chrysler to see that organizations cannot ignore the importance of the human factor.
#3 An Economy Where There Is No Extra Fat
The recession of 2008 seems to be a reoccurring theme here, but its influence on the private equity buyouts cannot be underestimated. Potential buyouts are more difficult to find, competition is fierce, financing is more difficult to secure, and achieving the desired ROI is more challenging after the recession, as is backing out from potential dealsª. With these “non-human” elements in play, it is even more imperative that the human factor or human capital comes into play. Why?
#4 More than a Spreadsheet
The new regulations of the post-recession era have forced a switch from a more distant let’s-look-at-the-spreadsheet-approach to buyouts to a more “active ownership” role for private equity buyout firms. For those firms embracing this more personal approach to buyouts, there can often be some challenging questionsª. Exactly what is active ownership and how do you measure it? What are the ethical guidelines for the section you are working in? How transparent is the industry you are working with?
#5 At Home Is Where It Counts
Moving forward and succeeding in the new private equity buyout sector begins in-house. It is critical that private equity firms establish a set of in-house rules, regulations, processes, and a culture that lines up with the demands of the new market place. In addition, private equity firms should have a niche strategy or long-term area of focusª. They should implement, if they haven’t already, a playbook of processes, reports, and communication standards. Organizational culture should be based on some of the softer skills, including positivity, collaboration, and innovation.
#6 Only Hire The Best Of The Best
Private equity firms that hire the best of the best will win in the end. However, the criteria for ‘best’ is changing. Instead of hiring the professional downsize[r] (eg. “Up in the Air” character Ryan Bingham played by George Clooney) or the financial whiz kid, a private equity professional should also possess critical thinking skills, humor, sociability, project management experience, coaching/mentoring ability, passion, engagement, and a superior work ethicª. It’s a tall – but critical – order as the individual skill set of each and every employee is perhaps the most important part of this changing paradigm.
The future of private equity buyouts boils down to this: Business leaders and mid-level employees must approach the future with flexibility, creativity and a spirit of innovation. After all, the competition is stiff and while brand names may open doors, a single person can lose the dealª.
ª Terrikangas, Dr. Satu. “Managing private equity buyouts – Cracking the human element.” University College of London. Mercury Urval.
º “Home – pmX.” pmX. Program Execution, 20 Mar. 2015. Web. 20 Mar. 2015.