The leadership impact private equity firms achieve through better executive selection has long been underestimated — but a growing body of evidence is redefining how sponsors think about talent as a value creation lever. However, a new concept is emerging that could redefine how we understand value creation in this field: Leadership Impact.
Understanding Leadership Impact
Leadership Impact refers to the value created from CEOs’ outperformance. In other words, it’s the additional value that a company gains when its CEO performs above and beyond the average. McKinsey’s research indicates that top-quintile CEOs have historically delivered total shareholder returns that are 9 percent above industry peers each year of their tenure. In certain industries, such as financial services and automotive, these high-performing CEOs have achieved excess total annual returns of 16 percent on average.
The Role of Leadership Impact in Private Equity
In the context of private equity, Leadership Impact becomes even more critical. If the CEO of a PE portfolio company, who is responsible for strategic decisions, lacks the right leadership capabilities, the desired operational improvements may not materialise or be sustained.
In a recent survey, 94 percent of general partners believed that PE portfolio company leadership contributed an average of 53 percent toward investment returns. This underscores the importance of Leadership Impact in the PE industry.
Building Distinctive Capabilities
To achieve Leadership Impact, PE portfolio company CEOs need distinct capabilities. These go beyond typical leadership traits found among the best public company CEOs and account for PE-specific time horizons for investment and exit, as well as speed to impact.
Investing in human capital now can pay off over the longer term. Whether the CEO is new or an experienced leader, an expert practitioner of PE, or someone with a more diverse background, the essentials of Leadership Impact can be customised and adapted to meet their unique context and opportunities.
Conclusion
The concept of Leadership Impact is an idea whose time has come in the rapidly evolving Private Equity industry. By focusing on building distinctive leadership capabilities and harnessing the power of Leadership Impact, private equity firms can unlock new levels of performance and value creation.
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.
