Private Equity Days of Thunder

In today’s private equity market, interest rates are up, the number of attractive targets is down, investment hold times are longer, and the era of the successful management "sicario" is coming to an end.

During the recent years of low interest rates and high deal volumes, many PE firms replaced the acquired leadership team with a squad of management "sicarios" to cut expenses, pile on debt, and push for high returns, achieving quick and successful exits. In those prosperous times, it was hard to criticize this approach. It worked; the growth and success of the private equity sector over the last decade are testament to that.

However, like the oil and gas industry, every boom eventually faces a bust. The "sicarios" were effective for quick turns, but running a company like Cole Trickle in Days of Thunder burns the tires off the car well before the last lap. To achieve the desired ROI from acquired companies in our current environment, private equity firms must generate value organically by actually running the acquired company. This requires time and money to carefully conduct due diligence and select the right leaders to shepherd the acquired company from acquisition to disposition, creating measurable value along the way.

According to AlixPartners’ eighth annual PE leadership survey conducted in 2022, private equity executives cited leadership effectiveness as the most important lever for creating value in their portfolio companies. In fact, this was cited 70% more often than short-term operational effectiveness achieved by the management "sicarios."

Although we agree that portfolio company leadership is the most critical lever of value creation, research suggests that the rate of incompetent leadership in all phases of modern life ranges somewhere between 65-75%. For the most part, humans are not particularly good at making talent decisions when relying on instincts alone. This is especially true in private equity, where time and money pressures work against thoughtful talent diligence. It is not that PE firms lack competent leadership; rather, they are just not proficient at assessing, identifying, and selecting leaders within the companies they acquire.

Human capital diligence and talent development are not areas of focus or expertise for most PE firms. At EnLite, we use a scientific approach to help our PE clients objectively assess leadership talent against the backdrop of their objectives and the critical capabilities required for success. Using predictive psychometrics, decades of validated research, and advanced interpretation skills, we help de-risk the human capital side of the investment pre-deal and accelerate performance and time to value post-deal.

If you're interested in learning more about leveraging human capital data and insights to gain an edge in today's market, contact us here.