PE firms are prioritizing human capital and elevating talent executives
Talent is widely recognised as a key driver of value that can differentiate portfolio companies and position them to achieve objectives. In the current environment, it is a top concern for PE and VC teams. LPs are scrutinizing their GPs’ talent management programs closely.
In EY’s 2022 survey of global private equity firms, more than half with over $15 billion AUM said talent management is their most important strategic priority aside from asset growth. At firms with $2.5 to $15 billion AUM, 65% put talent management at the top of the list.
An emphasis on talent is also prevalent amongst leading firms in the rapidly evolving Indian private equity market. Amit Dixit, Blackstone’s head of Private Equity in Asia, attributes the firm’s success in part to ensuring that the right people with the right alignment are in critical leadership roles.
Correspondingly, PE talent executives – whether chief talent officers, chief performance officers, human capital operating partners, or talent portfolio managers – are on the rise. They bring value to each stage of the deal cycle, assessing C-suite leaders’ ability to deliver on the deal thesis or identifying cultural issues, for example. Many are also experts in DEI and people analytics.
"At a recent NYC conference on talent in private equity, Human Capital Partners from several PE firms highlighted their role during pre and post deal conversations to help assess and anticipate talent needs across portfolio companies. They also enable Operating Partners to look for leadership qualities and considerations beyond core competencies that will be predictors of success. These dimensions include aptitude, attitude, and demonstrated followership to be able to attract talent to the team."
Macro trends and new ideals are reinventing the portfolio company CEO
As PE firms focus on cost optimization and efficiency, many are moving away from the traditional finance-centric profile in favour of CEOs with operational expertise. Leaders who can implement operational improvements that increase profitability and competitive advantage are essential as market confidence ebbs and competition intensifies.
ESG imperatives are creating the need for CEOs who can help drive ESG initiatives. This requires the ability to communicate the ESG vision and value proposition to LPs, and motivate employees around it, which may require a significant culture change.
These are crucial gaps in need of filling. PwC’s 2023 CEO Survey found that PE-backed firms lag in almost every non-financial issue facing companies today. Less than half of the CEOs surveyed, 42%, include ESG issues such as gender and racial diversity in their corporate strategy. Greenhouse gas emission targets rank even lower, at 20% in the U.S. and 37% in Europe.
Most CEOs believe their organisation will need fundamental change in order to prevail amidst changing customer demands, regulatory changes, skills shortages, energy transition, technology and supply chain disruption. Portfolio companies in the industrial sector need leaders who can not only manage change, but champion it.
"We experience more and more that CEOs don’t only need the necessary subject matter expertise of the sector they are active in, but more importantly a leadership style which fosters cooperation and an ambition to grow and win as a team. This means that we put an increasing emphasis on checking the preferences, the capabilities, and the leadership style of the candidates we promote for a CEO role."
Private equity CFOs keep evolving beyond the finance function
The extraordinary growth of PE firms in the past decade has expanded the role of the CFO – and now it’s expanding even more. CFOs are involved in talent management priorities, decisions around technology deployment, and contributing to portfolio company management.
The majority of CFOs in EY’s 2023 Global Private Equity Survey rank talent management as their second-highest strategic priority after fundraising. Hiring and retaining talent are considered key to remaining competitive and achieving sustainable growth. This is elevating the role of CHROs as well; in more advanced firms, they report directly to the CEO rather than the CFO.
CFOs are also becoming strategic advisors as their organisations grow, the PE industry matures, and the need arises for more leadership on matters such as adding product offerings, expanding the investor base, and managing strategic transactions.
CFOs need to be more tech savvy as they step up to lead digital transformation and deploy data and technologies aimed at improving front-office decision making and operational efficiency. The industrial sector is especially well positioned to benefit from digital transformation, underscoring the need for tech-savvy CFOs in the space.
"Reaping the operating efficiency benefits from the evolution of the technology stack supporting traditional, lower value-add finance functions requires that the CFO has a deep understanding of system functionality. We see the need for dexterity around the use of big data to monitor a broad set of KPI’s, adding value both at fund and portfolio company level. Add to that the need to hire and retain top talent in an increasingly competitive environment, the CFO requires both numeracy and humility to perform in this role."
LP focus on operational improvement is swelling the ranks of PE operating partners
As PE firms increase their involvement in portfolio company operations, they are hiring more operating partners – a trend that is not new, but escalating significantly. A 2022 survey of PE operating leaders in the U.S. found that 82% expect to grow their operations teams. More than half, 58%, anticipate growing them by 50% or more over the next two years.
The hiring uptick is notable in funds that invest in middle-market industrial companies, which tend to require guidance to rectify inefficiencies and remove growth constraints. Operating partners with expertise in digital transformation, ESG, and supply chain are in high demand in the industrial sector. Across sectors, cybersecurity, ESG and DEI are key areas of focus.
Operating partners still focus mainly on pre-acquisition and early holding periods. In 2022, 97% said they become involved in portfolio companies within the first two years. But engagement has increased across the deal cycle. This includes a sharp rise in involvement after the two-year mark, from 30% in 2015 to 74% in 2022, as portfolio companies confront unexpected challenges in a volatile market.
"A climate of uncertainty has limited deal activities, but funds are investing in value creation, to prepare assets for exits as they anticipate macroeconomic improvements, and Operating Partners are key to driving value creation.
Whether they hire generalists or functional specialist Operating Partners, PE funds target professionals with high IQ and EQ and the “antennae to read the room” to build effective relationships with portfolio company management and deal professionals."