In the realm of private equity, leadership value creation is increasingly recognised as the most powerful lever sponsors have — and the evidence on leadership value creation private equity firms can unlock through better talent decisions continues to mount. As portfolio companies grapple with labour shortages, talent strategies are becoming crucial to the successful execution of value-creation plans.
The Human Component in Digitalisation
While digitalisation is playing an increasingly prominent role in value creation, the human component remains key. Private equity clients are investing more in human capital as part of their value-creation efforts, especially as they undertake larger transformations.
There is a growing trend for corporates to introduce chief transformation officer roles. This trend is spreading into private equity, reflecting the fact that they are pulling many more levers.
The Challenge of Optimising Human Capital
Optimising human capital has become increasingly challenging in recent years, given a pervasive talent shortage in many sectors. The importance of investing in existing employees is emphasised due to the high cost of acquiring and training new talent.
Many businesses are struggling to find the talent they need, making human capital a potential Achilles heel. Some companies that had previously embraced a remote workforce are now restricting hiring to those living in areas that enable them to come into the office.
The Impact of Covid-19
The transition out of the Covid-19 period has created a plethora of challenges. The importance of ensuring that employees are well paid, have meaningful careers, and development opportunities is highlighted.
The Covid-19 pandemic demonstrated that many people could work effectively remotely, but this inevitably led to a loss of colleagueship. Balancing this line has become critical.
The Evolution of Value Creation
Maximising the effectiveness of human capital has become more of a priority because other value-creation levers have already been pulled.
The first wave of value creation involved financial engineering. Around 15 years ago, operating partners started to be hired into funds to drive operational improvements post-deal. A third wave began around six years ago with talent operating partners being integrated into operating teams.
The role of human capital in value creation is evolving and becoming more significant. As the landscape continues to change, private equity firms will need to adapt and innovate their strategies to succeed.
HMN Capital also offers a dedicated Talent Risk Assessment, a five-day leadership diagnostic that gives PE sponsors and boards an evidence-based view of management team risk across eight critical dimensions, before it affects value or timelines.
Working with a PE or VC-backed business and looking to strengthen your leadership team? Find out how HMN Capital can help or get in touch directly.
