Private Equity – People Strategies for Better Exits

Private equity people analytics

Private equity has made an enormous contribution to the economy over the past 20 years. But competition is getting stronger and the environment is no longer as target-rich as it used to be. To keep delivering high multiples and stellar exits, PE has to get smarter. We discuss the following 5 areas where proven Method Teaming tools and methodologies can help PE firms optimize the portfolio and deliver top quartile exits every time.

 

Executive Team Analytics. Delve beneath the portfolio leadership’s sea of faces to the real people beneath using the Method Teaming dashboard. Discover whether they are a highly engaged team or just colleagues who occasionally meet together. Highly engaged teams are 23% more profitable than those who are not.

Seat on the Board. Empower your firm’s representative to guide the portfolio team towards ‘smart collaboration’ and the certainty of a successful exit. Smart collaboration is the guarantor of profitability. It can only be achieved when people understand their own and each other’s work ‘Intellect’ and when those Intellects combine to make a strong fit for the team’s mission.

Mergers and Acquisitions. Convert from walls of resistance to extraordinarily effective collaboration in a short space of time. Method Teaming provides a language for the smart collaboration culture every employee has been yearning for. This brings all sides together, removes barriers and produces winning teams.

Operational Improvements. Speed progress and bring forward the timing of a valuable exit. If you are long on plans but short on execution we know how to bring in a road map that can get more done in a short space of time. Engaged teams bring more positive outcomes, faster.

ESG. The single greatest gift you can give someone is an understanding of their born-with gifts so they can apply these and use them in their organizations and teams a majority of the working day. That joy ripples out to their family, friends, community and country. Building engaged teams lies squarely within the domain of ESG.

 

1. Executive Team Analytics. Delve beneath the portfolio leadership’s sea of faces to the real people beneath using the Method Teaming dashboard. Discover whether they are a highly engaged team or just colleagues who occasionally meet together. Highly engaged teams are 23% more profitable than those who are not.

PE firms that deliver a top quartile performance in one fund often repeat the process. In fact according to Bain & Co a PE firm that excels with its first fund has a greater chance of replicating that success with the next fund. For GPs that have managed a top-quartile fund, there’s a better than 6-in-10 probability that their successor fund will also be an above-average performer.

So, if your last fund was top quartile, can you afford to be relaxed?

Obviously not.

There’s still a greater than 3-in-10 chance that your next fund will be mediocre, or worse. You might use the same measures, processes, people and strategy as you did the first time. But there’s still no guarantee that you will pull it off.

What else can you do to be sure of success next time? To understand this, let’s take a look at what is usually regarded as the most unpredictable dimension of all, the people dimension.

These days, all valuable work carried out in organizations is done in teams. There is no place any more for the lone genius. As Bill Clinton might have said, “It’s about the team, stupid”. For instance, sales teams (often ‘EQs’ in Method Teaming language) need strong integration with the ‘PD’ proposal writers, the ‘Networkers’ in account management and the ‘Strategists’ in product management and innovation in order to succeed. Innovation teams require input, likewise, from PDs, Networkers and EQs to ensure their new product suites can be built, can be sold and are socialised throughout all parts of the organization. Service delivery, equally, requires people with different ‘Intellect’ make-ups to strike rapport with customers.

When we consider a portfolio company’s management team, it’s vital that it exhibits the kind of interplay and crosstalk – what we call ‘smart collaboration’ – that characterises truly successful teams. But here, matters can get a little opaque. Many of us pride ourselves on our ability to read other people. Unfortunately, those readings are often skin deep and rarely see through to the deeper layers that govern how people work. Personal insight is therefore too subjective to be of value and is anyway too difficult to share with colleagues. An objective toolset is necessary.

PE firms instinctively know this and are looking for a better way to read whether or not a management team is really ‘joined up’ and functioning as the company’s brain. This is critically important. They know it’s not enough to assume that just because the company has done well enough to get where it’s got, then the leadership team must be good enough for the next stage. They want answers to questions like these:

Does the team really integrate and collaborate as well as it could? Markets can change and new disruptive technologies can appear. Will the team who navigated the last set of problems also be able to navigate the next set of – almost certainly different – challenges? How many of the directors are hiding that they are disengaged and demoralised? These have little loyalty to their fellows and may leave at the first opportunity. Did the company succeed partly because of luck, riding a single successful wave, but has no experience of dealing with consecutive competitive threats? Do they have a continuous innovation machine that can bridge smoothly from ideation to engineering and bring winning products and services to the market at the right time? Do they have the right combination of talents and intellects to cover all points of the company’s mission or are they overweight in some areas and underweight in others?

If Private Equity doesn’t have a strong grasp of every one of these people issues, all the financial analysis in the world may be in vain.

There’s a useful parallel in business that helps to confirm the view that the people dimension is crucial to success. In the world of project management there are four key areas that need to be managed. These are:

Strategy

Process

Technology

People

It’s well known that at least 70% of business change projects either fail outright or deliver well short of their objectives. When project managers are surveyed and asked why a particular project ended with sub-par results, the answer 95% of the time was that it was due to failings on the people dimension. It’s relatively easy to address strategy, process and technology. But the people dimension is much harder to get right. As in project teams, so in management teams.

Management Team Analytics.

Fortunately, there’s hope. Method Teaming is the leader in a new field of analytics that looks at team capabilities. How people work and collaborate together is far more important than how people behave when they’re alone. When people collaborate on any project, including routine day-to-day work, they need to blend their natural abilities together with perfect multilateral proficiency. It’s not enough to consider different skill-sets and try to connect these up. Collaboration based on skills is doomed to fail. It’s the reason why only 33% of workers in the US and 10% of workers in Europe are ‘engaged’ at work (Gallup figures). It’s vital to base collaboration on natural talents instead.

Until recently, business did not have any science, methodology or language that could bring about true team collaboration. Many companies have experimented with collaboration ‘workshops’ and other techniques. But none of these has yielded a breakthrough that gives lasting results.

To deliver true team collaboration, or ‘smart collaboration’, Method Teaming uses a unique language, math and science. This is several evolutionary steps beyond anything that has come before in this field. The language can be learned in minutes and allows people to understand each other’s capabilities in the context of their own.

But here’s the good news for hard-pressed PE professionals. The complex output of all of this science can be rendered in a simple dashboard that anyone can read. The detail is available too. But the ‘team dashboard’ provides insight at-a-glance into how far the executive team is already capable of smart collaboration and whether it has the right talent make-up for its mission. The dashboard also indicates how to move an under-performing management team further up the road towards smart collaboration.

The dashboard increases PE’s oversight ability and de-risks much of the uncertainty surrounding the people dimension.  It endows the PE professional with an insight into what’s really going on in the management team and allows them to make a more valuable contribution. These executive team analytics will complement the financial analytics already at his/her disposal to deliver a completely comprehensive view of all the company’s assets. The chances for any unpleasant surprises on the people dimension are now considerably reduced. This renders the PE firm’s investment vastly more secure than before.

 

2. Seat on the Board. Empower your firm’s representative to guide the portfolio team towards ‘smart collaboration’ and the certainty of a successful exit. Smart collaboration can only be achieved when people understand their own and each other’s work ‘Intellect’ and those Intellects are a strong fit for the team’s mission.

The Private Equity firm’s seat on the Board is truly a hot seat. Let’s look at what is going on.

You have to understand a new business. You have to understand and work with new colleagues. You also need to get a grip on the financials. That’s the easy part. But colleagues on the board don’t know if they can trust you. You’ve made a close connection with the CEO and CFO, possibly the COO, before your GP purchased the company. You’ve made enquiries and identified the key people you want to retain, the people you want to lock in with golden handcuffs.

But you don’t know whether the team as a whole really works together. You don’t know whether it’s a joined-up, fully communicating, smart collaborating, connected and interwoven team in which thoughts and ideas spring naturally from creation to fruition like a conveyor and the right person is allowed to take the lead at the right time. Or whether it’s an ordinary run-of-the-mill team where members address each other superficially by job function, as if the labels they carry can accurately identify what they can contribute.

Instead, what if you could instantly tell whether the board as a whole, the entire leadership team, was fit for purpose? What if you could see that there were huge holes in the intellectual make-up of the team, that signified problems ahead? Maybe a lack of strategic thinkers and therefore a resultant dearth of innovation. Or the opposite, maybe too many strategic thinkers who are not good at finishing projects and just get in each other’s way? Or maybe the CEO is a deep-thinking engineering type who sees success through projects, not people, and doesn’t know how to socialize ideas to gain buy-in. Or maybe…

There are many, many potential pitfalls when teams are just collections of individuals. How much more of a difference could you, as the PE professional with a seat on the board, make if you could see all this, at-a-glance and offer some resolution? How much more authority and certainty would that give you in guiding the company to a successful sale?

Of course you might find that the team was exactly balanced with all the right talents in place to execute its mission. Unlikely, but possible. But wouldn’t it be good to know? Otherwise you and your GP’s investment could be headed into a wall.

We’ve already discussed how the Method Teaming dashboard can give you at-a-glance information on the team’s fitness for purpose and its ability to collaborate naturally.

But beneath the dashboard, Method Teaming holds a huge reservoir of powerful information that empowers you to advise on any strategic moves that are necessary to ensure the leadership team is covering all its bases. Bain & Co says that “PE firms aren’t known for their skill in diagnosing culture conflicts, retaining talent or working through the inevitable HR crises raised by integration. Firms often view these so-called soft issues as secondary to the things they can really measure.” But with this detailed information and our expertise behind you, Method Teaming can help you give objective advice to fine-tune the team so that nothing gets dropped. Plus, if more talent is needed as the company grows, we’ll help you pick exactly the right candidate from the short-list who will fit perfectly into the team so that the company continues its upward trajectory.

All of this can be done with zero risk, little cost and minimum delay.

If you’re going to take a seat on the board, it doesn’t need to be a hot seat. It can be a seat of soft power enabling you to give cool advice, calmly.

 

3. Mergers and Acquisitions. Convert from walls of resistance to extraordinarily effective collaboration in a short space of time. Method Teaming provides a language for the smart collaboration culture everyone has been waiting for. This brings all sides together, removes barriers and produces winning teams.

According to Bain & Co PE funds are increasingly turning to large-scale M&A to solve what has become one of the industry’s most intractable problems—record amounts of money to spend and too few targets.

But the trend has come with an interesting new twist. M&A used to be about finding an opportunistic transaction involving buying of one company in order to bolt it on to another. The rationale for the deal was about finding synergies and opportunities to lower joint costs, merge operations or move higher up the value chain. This often worked well and the new joint company could be sold for a greater amount than the sum of its parts.

The new twist involves a longer-term strategy in which PE buys a ‘platform company’ which by itself may be unremarkable. But the equity firm then goes on to buy several more smaller businesses and integrate them into the original platform. This is all part of a highly planned and co-ordinated strategy to build an enterprise that will become a leader in its field. The original platform’s management team may not have had the vision or the capital to carry out the acquisitions. But the addition of Private Equity into the mix brings strategy and financing to build an industry diamond that will capture the attention of the markets.

Some of these strategies have worked successfully. However, according to Bain others have come adrift at the seams. The reason for the failures is all in the execution of the integration. PE firms are used to looking for cost benefits such as better deals with suppliers, sharing of warehousing and distribution or opportunities to improve performance. But if these ‘balance sheet’ issues play to a GP’s strong suit according to Bain, people and culture issues usually don’t. As stated above, Private Equity firms aren’t known for their skill in diagnosing culture conflicts, retaining talent or working through the inevitable HR crises raised by integration. Firms often view these so-called soft issues as secondary to the things they can really measure. Yet people problems can quickly undermine synergies and other sources of value, not to mention overall performance of the combined company.

This finding tallies with the oft-repeated complaint by project managers involved in major change projects that people issues are the hardest to resolve. In survey after survey, project managers in all disciplines routinely report that up to 70% of projects fail. When they do so they fail not on the strategy, process or technology dimensions but on the people dimension. This ‘soft stuff’ is the hardest to get right. It’s the graveyard of mergers and the domain which can wreck all the carefully planned work everywhere else.

In private equity, a failure on the people dimension can end up costing a huge %age of the forecast savings and benefits. If formerly competitive teams are slow to work together or a poorly-managed integration results in large numbers of high value managers leaving, the rationale for the merger is in jeopardy.

This vital area of the ‘people dimension’ is where Method Teaming can be of most service to PE and the various components involved in merging with the original ‘platform’.

Method Teaming’s focus is to put people in roles where their natural talents will be fully engaged with both the role and with the people around them. In doing this, a new ‘talent culture’ takes root which captures the excitement of both the acquiring company and the acquiree. This removes personality, culture and even job title issues at a stroke. Most people just want to make the biggest contribution they can to their employer and to be valued for that contribution. Method Teaming permits this to happen. Then, when people are in a role which fully engages their talents and are working with others similarly engaged, they perform to a very high level. Cue a perfect merger integration – and on to the next one.

In this way, the PE strategy of buying a platform and increasing its value by adding up to 3 or 4 more businesses that flesh out its strength and reach becomes viable. The risk of problems on the ‘people dimension’ causing plans to come unstuck falls close to negligible.

The lesson that Bain is trying to teach us is clear: if you want to ensure that a strategy based on mergers is going to succeed, you need a strategy to deal with the people dimension. Method Teaming can be the tool around which that strategy is built.

 

4. Operational Improvements. Speed progress and bring forward the exit. If you are long on plans but short on execution we know how to bring in a road map that can get more done in a short space of time. Engaged teams bring more positive outcomes, faster.

The traditional strategy of buy-hold-sell has been a successful one for PE. Currently, the average holding period is about 4.5 years, down from a high of 5.9 years in 2014. Whilst holding their charges, GPs have not taken on the mantle of management consultancies and tried to upgrade processes or technology or systems. And why should they? Nobody should try and be everything. It would require a massive change of focus and uplift in manpower for a KKR to become a McKinsey. That could be as challenging and risky as Boeing deciding to build ships.

Nor, in our opinion, should GPs attempt to invest in capital equipment, software systems, new plants, re-location or any other major business change project. It’s just not their bag.

However, GPs are nothing if not savvy. Are there are any operational moves they could make that would cost little to implement and carry almost no risk, yet yield a bucketful of extra productivity and profitability?

There is one.

Recently, the ‘people dimension’ has emerged as possibly the biggest unmined seam of wealth in global business. Over the past 40 years we have seen huge leaps forward on the technology, process and strategy dimensions. But technology is almost played out: each new project now delivers a couple %age points increase in productivity, at best. It’s hardly worth the risk. And every new CEO is almost obliged to conduct a strategy review. Yet there has been no comparative focus on the people dimension. This is well overdue.

According to Gallup, who have the most comprehensive data in this area, a staggering 67% of employees in the US are ‘not engaged’ or are even ‘actively disengaged’. They are going through the motions at work, counting the minutes till ‘go home’ time. Their productivity, speed, work quality and profitability per head severely lags the 33% who are fully engaged.

But it gets worse.

In Europe, which is often considered to lag the US only by a little, a staggering 90% of employees are not engaged. In Japan and the Far East it’s 95%. The Japanese worker’s diligence and willingness to work long hours is legendary. But it comes at a price. Japanese employees hate their jobs. The Japanese ‘social contract’ has been to devote themselves to their work in return for guaranteed job-for-life employment. They don’t expect to like their work, as we in the West increasingly do. They thought that commitment could compensate for satisfaction. It sadly doesn’t. When people hate their jobs (or to put it in business speak, are ‘disengaged’) they cannot excel. This means they spend more time re-finishing work that was done previously, they are slower, less productive overall and less profitable per head. And contrary to perception, innovation also takes a big hit.

Even mighty Germany is suffering. 85% of German employees are not engaged, a rate only slightly better than Europe’s 90%. Yet Germany is prosperous and forward-looking. What could the Germans achieve if they had better management that actually tried to engage them at work? What about the Japanese? What about the rest of us?

The Gallup figures tell us that there is major upside from increasing ‘engagement’ even by a few percentage points. When you increase engagement, without changing the numbers or the people in the workforce, you don’t increase cost in any way. But you can significantly increase speed, quality, productivity and profitability.

Private Equity is young and dynamic enough to still be able to test new ways of doing things. It is at the opposite end of the scale from heavy manufacturing or auto making or farming where innovation is harder to introduce. The way is open for Private Equity to make a significant impact on the people dimension in portfolio companies, with little risk or cost, using industrial-strength tools like OND’s Method Teaming. That impact will make a major difference to people’s lives. But it will also make a major difference to profits.

When you consider that the PE ‘holding period’ for companies is on average 4.5 years, what better way to spend that time than making a significant ‘people dimension’ improvement? That will not only burnish the GP’s ESG credentials, it will make the eventual exit much more profitable.

 

 

5. ESG. The single greatest gift you can give someone is an understanding of their born-with gifts so they can apply these and use them in their organizations and teams a majority of the working day. That joy ripples out to their family, friends, community and country. Building engaged teams lies squarely within the domain of ESG.

See also this video: https://youtu.be/L64CKRXyR08

Let’s start by admitting that there is some ambivalence within the PE industry in its attitude to ESG. According to Institutional Investor the vast majority of private equity ESG efforts remain nascent and superficial. They go on to say that while the rhetoric is there, it’s not necessarily matched by progress. They mean that there are a lot of warm words for ESG but that actions are lagging a little behind.

This seems a little unkind as many of the biggest GPs have launched vast funds aimed only at ESG investments. Is this purely an exercise in PR to show that Private Equity cares for people and planet? That’s hard to believe. ESG is on everyone’s lips these days. For example here’s yet another headline announcing an industry pivot towards ESG, this time from OilPrice.com.

But whether a PE firm is looking to make genuine ESG impact or whether it wants to be able to put an ESG check mark beside an existing investment that was made before the issue of ESG arose, there appears to be an opportunity to do both.

Environment. Social. Governance. This opportunity lies squarely within Social.

According to Standard & Poor’s, the Social aspect of ESG addresses how a company can manage its relationships with its workforce, the societies in which it operates, and the political environment. Most examples of Social relate to communities ‘having something done to them’ that improves their quality of living. For instance if you are Big Tobacco and you invest in better housing and sanitation for your plantation workers in Kenya, you improve their health, their longevity and the prosperity of the community around them. You also get praise and better support from the local government. The payoff comes when you realize higher profits due to your workers always being available to work, not sick, and working more diligently because they feel valued. Overall the extra profits that come from having contented workers outweigh the costs of the housing investment.

So far so good.

But what if your employees are in Marseilles, France or Denver, Colorado and it’s not so easy to make the public healthcare argument because they already have it? Can you still make a genuine ‘Social’ ESG score?

Yes, you can.

Consider this. As stated elsewhere on this page, 67% of workers in the US, 90% of workers in Europe and 95% of workers in the Far East are either disengaged or actively disengaged from their work. This means, to put it in common language, that they hate their jobs. They are demoralised, unmotivated and only turn up for the paycheck. The quality of life of demoralised workers is low, their sense of purpose is dimmed and they are destined to live out their lives having never shown the world what they’ve really got in the tank. This is not what any of us wished for our employees. Yet it’s what they experience and will continue to experience, to the Nth generation, unless we do something about it. Surely, fixing this appalling sense of despair among our own workforces counts as a ‘Social’ win?

But it doesn’t stop there. Because of the ripple effect, the despair and hopelessness felt by such high percentages of workers cascades down and through their families, extended families, friends and communities. The unhappy worker who turns to gambling to numb his work frustrations isn’t spending money taking his family to the local restaurant because he’s already in debt. Waiters, cooks and business owners are now worried about their livelihoods because that worker is in the wrong job and isn’t spending money with them. Multiply this scenario by many millions across the planet and you get a sense of the total problem.

But now let’s look at the cost to businesses of having disengaged workers.

They are likely to treat company equipment with disrespect and may demotivate others with their complaints or negative talk. They are more likely to spend working time on social media or their favorite news channel when the boss isn’t looking. They will often use company time to look for another job. Their ‘head’ is not in their work so they are more likely to make mistakes and to take a long time to get stuff done. They’re inefficient. According to Gallup disengaged workers are 27% less profitable per head than those who are engaged. That’s a mighty cost.

The ‘Social’ of ESG normally looks at how a PE investment can benefit communities that have largely missed out on industrialisation and globalisation. The implication is that these communities may be in the world’s poorer zones. But what about workers and communities that are closer to home in wealthier countries. If they are suffering – and they are – don’t they also merit attention and inclusion on the ESG target list?

Solution. There is a solution that can help workers, their families, extended families, communities and even their employers. It can restore purpose and meaning to derelict lives. It will also boost productivity and profitability in the enterprises that employ them. Does that sound too good to be true? In our experience, it’s exactly true.

The underlying problem causing the disengagement is that organizations don’t match job roles to what lies at the core of a person’s being: their natural strengths and talents. Instead we match job roles to a person’s skills and qualifications, which frequently are far removed from their natural talents. That ‘disconnect’ virtually ensures dissatisfaction. It’s the bane of so many lives.

Method Teaming is a set of tools that can fix the problem. When hiring managers use Method Teaming to build teams, departments and organizations, they are correctly matching people to the jobs their brains were made for, possibly for the first time in their lives. When that happens you get instant traction between employee and job role.  And it now becomes possible for people to excel at work, something that’s possible only when people are doing the work their brains are equipped for.

The benefits are obvious. Employees love to do the work they were made to do. We are all made differently so there is someone for every job. When we do the work we love, we do it well, we do it quickly and we do it to high quality. When we return home after each working day we pass on our good vibrations to our families, friends, community and businesses. That’s ‘Social’ good.

At the same time our own companies benefit from our improved work performance. Productivity and profitability rise. If the company is part of a PE portfolio, the investors are set for a bonanza when the exit is finalised. Everybody wins.

This result delivers on the twin promise that ESG makes: that you can do good while doing well. For those who always believed in ESG but were struggling to find the perfect portfolio company where all the right conditions (i.e. problem conditions) were present, well, the right conditions are present in almost every company you hold.

 

Conclusion

Private equity is one of the youngest and most dynamic industries ever to grace the inside of a stock market.

Its impact on the financial health of companies and its boost to asset prices is a phenomenon. Its holdings have gone from near zero 30 years ago to a couple of $trillion now. Meanwhile it is re-shaping the ambitions and practices of pension funds and luring them away from the frigid no-growth zones known as bonds.

Private equity has also brought hope. For many investors the ‘secondaries market’, a private equity-driven trend has arrived on the scene to free up money that was locked into companies with little liquidity. Company founders and other investors can now turn shares into cash to fund their retirement more easily than ever before.

Still, there are improvements to be made. PE hasn’t exhausted all the innovation in the tank, not by a long way. Just like the early days of chess there are new gambits, offences and combinations to be made that will eventually create new champions and open up new theatres of value. Method Teaming is the science, methodology and language to keep beside you as you look for solutions which innovative PE can apply but which ordinary boardrooms have failed to find.

Ciaran Nagle, Global Marketing Manager

 

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