Let the Value Creation Plan Guide Critical Post-Close Talent Decisions


In the urgency to drive growth and expedite lucrative private equity exits, talent is often a determinant of success and failure.

Deal partners spend copious amounts of time engaged in pre-deal due diligence, diving deep into company metrics and financials. Operating partners identify opportunities for growth and operational improvement and form a comprehensive business plans complete with objectives, initiatives, and KPIs designed to maximize value.

But all that time, effort, and work can swiftly be undermined without the presence of talent.

Management changes following a deal are far from rare in PE. Fifty-eight percent of PE-backed CEOs are replaced within two years of investment, while only 25 percent of CFOs remain in their positions post-close. This can at least partly be attributed to the fact that evaluating talent is a tricky proposition for sponsors, particularly at the executive level.

With deal competition having intensified in recent years, deal partners rarely get the quality time needed with the executive team to understand the depth of their expertise as well as their work style, culture, and habits. Shrunken exclusivity periods for sponsors and the global pandemic, which ushered in an era of less-intimate Zoom evaluations, have only added to the challenge.

These same obstacles also make it difficult for sponsors to ascertain whether the deeper levels of the organization have the people with the skillsets needed to execute the plan and realize the investment thesis. Without these insights, investment decisions are made based on fundamentals and value potential, with the expectation that talent will be evaluated and addressed along the way.

A failure to recognize a talent problem at the earliest possible moment can dramatically derail the value creation process. For that reason, the presence of a formal and operationalized value creation plan that can be socialized with the management team on Day One is critical for flagging and addressing any liabilities.

There are always going to be soft factors when evaluating talent at the highest levels of a target. Entrepreneurs and company founders are notoriously possessive of their creations. Even after the infusion of capital PE investment delivers, they can be resistant to change and the idea of working within the more formalized operational and reporting structure prescribed by sponsors. Defining the value creation plan with portfolio management upon completion of the deal can enable sponsors to immediately begin the process of establishing alignment with the management team or, in other cases, determining if there is going to be a disconnect that will necessitate changes at the top of the pecking order.

If changes should become necessary, the value creation plan can inform the type of replacements needed. Too often, in the search for executives, sponsors rely too heavily on their Rolodex, or they are unduly influenced by personal biases related to education or past experience. They may reflexively enlist the services of an executive with whom they have previous experience without considering whether the fit is appropriate for this case. Leaning on the plan removes bias and emotion from the equation and enables sponsors to find the leaders that are most appropriate for this specific scenario.

Similarly, the value creation plan can help the management team evaluate and execute talent decisions at the levels of the organization where most of the actual work is done. In some cases, the investment thesis will change the fundamental nature and composition of the PE-backed entity. Planned synergies with companies in the portfolio can potentially render certain job titles redundant or irrelevant. With the value creation plan as a guide, sponsors can arm management teams with the ability to accurately understand the state of talent and skillsets within the company and determine with greater speed and efficiency where help is needed or retraining of existing employees is required.

Assessing talent is often a subjective and interpersonal exercise. But even talent decisions can be informed by data and facts. A structured value creation plan can help sponsors identify the right leaders, find and plug any holes, and ensure the people capable of fulfilling the investment mission are in place.

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