The Human Side Matters – Has the Private Equity Sector Cracked it yet?

Welcome to the third blog in a 4-part series exploring and understanding the human dynamics in private equity buyouts — presented in conjunction with the change management consultants pmX — and based on the research findings from an academia-industry partnership between University College London and Mercuri Urval International.

In the last blog, we asserted the significance of the human element to buyout success. Despite the interviewees’ acknowledging the increasing centrality of the human side to the Private Equity buyouts, the majority observed how that the sector, overall, does not yet excel in this domain:

“Few PEs do well on the human side from deal to deal.”

“We aren’t particularly good at dealing with the human element.”

“Let’s face it … at the end of the day, we are financial nerds …”

In this blog, we look at how the interviewed senior private equity professionals rated their own sector as regards its current capability of dealing with the human side of buyouts.

Insight #1: More consideration to the human side is needed

To begin with, many interviewees acknowledged that the sector is, overall, more focused on the finance and business development sides of the buyout activity than its human elements:

“We spend too little time on people issues compared to the amount of time we spend on numbers.”

“Most PEs still focus on numbers only.”

Notwithstanding, it was recognized that there is a need for a greater attention to the human elements throughout the buyout process:

“We are good at the basic buyout process; but there is a lot of development to do with regard to cracking ownership and adding value.”

“We need to be more proactive on the human side in the due diligence, acquisition and ownership phases.”

“We need to spend more time upfront on people issues, not just on business hard facts.”

As interviewers, we observed varying social and human sensitivities between the interviewed Private Equity professionals. Whilst some are highly sensitive on the matter, others are less so. A comparison of the studied Private Equity houses’ approaches to Private Equity and buyout management points to there also being differences between Private Equity houses on this front.

Insight #2: Most people-related decisions are made on ‘gut feeling’

There appears to be an element of ‘gut feeling’, ‘own experience’ and ‘intuition’ in human-related decisions by private equity professionals, be it as regards relationship management, management assessment, cultural assessment, recruitment and board nominations.

In contrast to the degree of sophistication in the methods, models and tools to crack the financial, strategic or legal dimensions of buyout activity, it is surprising to note how seemingly effortlessly and intuitively the human element is addressed. Though the human element is identified as being critical, it is not approached with a ‘disciplined’ approach.

Insight #3: Is there an interest beyond top management teams in the portfolio firm?

Human issues and critical stakeholders tend to be equated with the portfolio firm’s top management team and CEO, with less emphasis on second line management, future talent, experts and employees. The Private Equity houses’ attention span toward the organization thus seems shallow. This is coupled with a scant reach toward the organization, resulting in a lack of information on the portfolio firms. This leads me to ask – is knowledge of the portfolio firm deep enough? Do PEs’ recognize their symbolic and emotional role as ‘owners’ toward the organization?

With a focus on the upper echelons of the organizational hierarchy, employees are considered as a resource. The term ‘employee’ was only actively mentioned in French and American interviews. This raises the broader question of the span of attention of boards.

Insight #4: Is management thoroughly assessed?

Despite the acknowledged centrality of management to buyout success, few Private Equity houses conduct robust and thorough analyses of this talent at the recruitment phase. Scant appreciation of the managerial talent pre-deal results in a potential talent and capability risk with regard to the management of the portfolio firm. In a similar vein, little attention is paid to organizational or cultural factors pre-deal, other than seeking e.g. “an organization with drive”.

Insight #5 – Strengths on the human side in buyout management and the human side

All the while, our analysis of the interview material leads to identifying areas of human-related strengths in buyout activity:

  • PEs focusing on the front-end of the buyout process: through smart sourcing of deals and long-term relationship-building with targets, they find good deals. They thus adopt a long-term approach to relationship-building through an active sourcing strategy combined with ongoing relationship-building with sellers, future owners, managers, advisors, experts, financers and investors etc.
  • An active ownership approach through corporate governance. The board, Private Equity professionals and the CEO/management team are in the driving seats. The balance in the relationships between these three central actors is critical to success.

Going forward: The direction is right!

With the shift in the Private Equity landscape, particularly since 2008, increasing attention is being paid to the various human elements in Private Equity buyouts. Given the significance of the human element, the direction is right. Nevertheless, the sector has not fully cracked the human side yet:

“We are on our way toward understanding human factors in Private Equity deals, we have taken the first steps, but we aren’t there yet.”

These considerations are paralleled with an ongoing reflection as regards

  • What is ownership?
  • What is (active) ownership, actually? What is the balance between interaction with and independence of the target?
  • Where can one learn ownership?
  • What are the sector’s ethos and ethical guidelines?
  • What is being industrial and who is industrial, actually?
  • How transparent as an industry should we be?

Is this the future competitive advantage in the sector? Stay tuned for the final installment of my four-part series in partnership with pmX.

In the meantime, if you are planning for an upcoming project, get a free – but confidential –evaluation to see how your project preparation and planning stacks up against industry peers and CEO Benchmarks. Click here to take the Transformational Change Self-Diagnostic.