HR’s value creation role in Private Equity

Ted notes the evolution of the HR function’s role from more administrative and traditional ‘personnel’ type activities into strategic partners and now value creators, that have a strong focus on leadership development. We witnessed this change first-hand, with PE firms ‘taking their own medicine’ and increasing capability in their own HR teams, having former CPO/CHROs sat within their value creation teams and the increasingly significant role CPOs play within portfolio companies.

Where once Private Equity firms focused almost exclusively on financial metrics to drive enterprise value, increasingly they are recognising that leadership and developing the human capital within their portfolio companies have a bigger part to play in sustainable value-creation.

The PE world has very specific challenges. Increasing revenues, finding operating efficiencies, and controlling costs in order to drive margin growth has long been the standard playbook for success. Value from financial engineering has played a significant part too, although this has fallen as debt capital has recently become more expensive. The focus has now turned to leadership evaluation and development to fill the gap – and to do that PE firms are investing in HR to help fix the problem.

Results from AlixPartners PE leadership survey of 2022 showed that leadership effectiveness was seen as the most effective lever for value creation. To address this, portfolio companies need HR expertise that moves beyond the transactional. They need a people and culture strategy that recruits, supports and develops the best leaders and effectively allocates leadership talent to the key value-creating opportunities across a portfolio.

Aside from bringing expertise in recruitment and assessment and a focus on culture and employee engagement, more businesses are now using a sophisticated succession planning process to drive value creation. They are looking at the ‘where, when and who’ in allocating their human capital, and their best leaders in particular, across the portfolio. Those firms who can elevate their management of human capital to the same level of sophistication as the management of their financial capital will be the ones who will likely be differentiated when it comes to generating sustainable long-term value. Implementing succession planning tools and processes for key roles, will undoubtedly create further value for the organisation.