Thought leadership

Can HR drive value creation through succession planning in Private Equity?

For decades many Private Equity (PE) businesses have focused on the allocation of financial capital and financial outcomes to the exclusion of human capital. With longer holding periods and buyers looking for a broader set of value metrics, now is the time for change.

Over many decades, PE companies may have run a standardised annual succession planning process with their portfolio companies (PortCos). Typically, this happened at an individual PortCo level and started with the management team organisation chart. The goal was to put names in all the succession boxes under each key executive. Given PE time horizons, these might be successors in a range of short term categories: those who are ready now; ready in 1-2 years; 3 years+. In parallel the trusty nine-box grid of performance vs. potential might also be populated. A further refinement was to look at the organisation charts and the incumbents in terms of A, B or C players. Are A players in key roles? If not, who needs to be replaced? It would not be unusual for this analysis to be ‘filed’ until the following year.

In general, this remained a very top-down and hierarchical HR process whereby roles at the same level are given a similar level of importance and value. Quite often the focus was the top 2-3 layers within the company, possibly missing emerging talent until it was too late. The process was also typically run at individual company level, rather than taking a wider view of talent across the portfolio.

In a 2018 book, Mckinsey’s Dominic Barton focused on a different way of looking at succession – the talent to value process. This really plays to the needs of PE companies, putting human capital on a level with financial. The focus is on how much value created by a role, not by where it sits in a hierarchy. Reviewing current performance, the 3-5 year medium to long term plans, coupled the relative growth of its different markets or geographies, enables owners to pinpoint exactly where the financial value will likely be created. This in turn drives the succession plan and how companies must allocate talent.

What does this mean for PE world? Now owners can allocate their human capital across a portfolio, and within a PortCo, in exactly the same way as financial capital finds its way to the deal with the most value accretion. The critical value creating roles must be given the best talent. This is all the more important given longer holding periods and investors looking at wider metrics such as culture and staff engagement.

This may mean PE owners have to look deeper across their businesses, focusing on roles, not hierarchies, and the wider talent pool that is available. HR can help allocate the best talent, highlight gaps where they may need to bring in new talent from outside, or else to fast track development plans of PortCo team to ensure they will create value. Furthermore, having clear succession plans across all key roles and having a clear strategy and process around it, gives future potential owners more confidence in what they are buying. When assessing a potential acquisition, the quality of the existing and future management team is now a key factor.

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