Senior Lecturer in Management at University College London
Private equity investors boast a better performance rate in acquisitions than their industrial buyer peers, who have a 50% failure rate. While the rapidly emerging Private Equity sector is attracting more attention, it’s usually focused on the financial dimensions of Private Equity activity. What’s missing is an in-depth exploration into the management of the buyout process, particularly around the impact of human dynamics.
This is the second in a 4-part blog series on exploring and understanding the human dynamics in private equity buyouts — presented in conjunction with the change management consultants pmX — based on the research findings from an academia-industry partnership between University College London and Mercuri Urval International. We interviewed senior professionals from UK, US, continental and North-European mid-market private equity firms considered leaders in their respective countries.
Our research revealed the importance of the human element across the private equity buyout process.
Here are five reasons why:
Insight #1: The Private Equity business model relies on the human element
The following quotes are taken from interviews we conducted with Private Equity executives:
“It is about people and only people.”
“It all starts with people, business is all about people.”
“People are at the heart of the Private Equity business.”
“People are everything in the deals that we undertake.”
“This is a people’s industry.”
Insight #2: Success criteria in Private Equity buyouts are people dependent
Based on our research, success criteria were identified as:
While this set of success criteria depends on numerous factors, it is clear that these success factors all relate to the human element. On the one hand, success requires excellence on the side of the Private Equity firm, be it with regard to the Private Equity professionals’ talent bases to be able to manage the buyout process, from purchasing, owning to exit. On the other hand, success also requires talent, capability and high engagement in the portfolio firm.
Insight #3: Many mistakes are people-related
Interviewees highlighted how most mistakes made in buyouts are related to the human element. Experts admitting to these failures also stated how they had become more appreciative and careful vis-a-vis the human element: “It has been a costly process to find out the significance of the human side.”
Mistakes were traced to occur across the entire buyout process:
These mistakes all boil down to people-related issues. They concern the quality of the decision-making and ownership management on the Private Equity side, the quality of the portfolio company’s management, and the quality of the board.
Insight #4: The human element impacts results
The human element in buyouts impacts success in Private Equity buyouts. As one interviewee put it – “The human element can make and kill a deal.”
Insight #5: The human element as the future source of competitive advantage
In the post-2008 context, wherein Private Equity firms are under increasing pressure from investors, financers and regulators for more responsible and active ownership, the significance of the human element is on the rise:
Want to learn more about trends in private equity? Stay tuned for the next in my four-part series in partnership with pmX on the increasing importance of the human element in private equity buyouts.
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