How PE Firms Can Effectively Link Talent Acquisition to Strategy
On March 7, the Canadian Venture Capital and Private Equity Association (CVCA) hosted an event for private equity investors on pre-investment talent assessment, acquiring top talent, and managing high performance teams. Panelists included experts from Kilberry Group, Korn Ferry and RHR Canada. The event was hosted by Stikeman Elliott and presented by The Leslie Group. This article is a summary of the topics discussed at this exclusive event.
Pre-Deal Assessment Of The Management Team Is Of The Utmost Importance
When you’re searching for a dream home, you hire a real estate agent. And, just when you think you haven’t found the right house, you walk into “the one” and very quickly have an emotional and psychological connection. But first, you need to conduct the home inspection to look behind the carpet and find where the deficiencies are. Thorough home inspections will help you make a solid, objective decision before you buy. Doing pre-deal due diligence of a management team is a lot like buying a house — it’s important to remove the emotion and psychological factors and get a professional, objective analysis before making the commitment.
What is the number one reason to do pre-deal management team assessments? To know who you’re buying and what you’re buying, reduce the risk of uncertainty, set the relationship up properly from the start, understand intangible assets and value creation opportunities.
Unfortunately, emotions and psychology are always factors, as we often fall prey to cognitive biases when reading other people, without even realizing it. Or, people adopt the “halo effect”, where we extend positive evaluations to other domains about a person (i.e. if someone is physically attractive, it is assumed the person is more likely to be perceived as kind and intelligence). Most PE firms go it alone when it comes to evaluating management teams. But, many firms do use external assessments and find these assessments to be more valuable.
Laying The Groundwork For Success
Most firms go into a deal with a great strategy and investment thesis lined up, and if you have access, you have conducted your financial, operational and management due diligence, you have a good understanding of the strengths and gaps of the management team, and you have added some key talent to pivotal roles.
External objectivity and insight are critical to understanding management teams. Your deal will be more successful if everyone understands the issues right from the start and have a plan to address them. In addition, there is not one definition of “good” leadership and there are many intangibles that matter a great deal. That’s where experts like Kilberry, Korn Ferry and RHR Canada step in.
The Management Team Assessment Process
Expert firms specializing in management team due diligence analyze teams and individuals using a “whole person” approach to ultimately develop an entire synthesis of data back to the client. The “whole person” approach is a strategy that “gets behind the hood” of an individual to understand their traits both professionally and personally — what motivates them, what engages them personally, and so on.
For example, Korn Ferry looks at both competencies and experiences (i.e. learned skills, behaviours learned in the workplace, mindset, turnarounds, assignments that prepare a person for future roles) as well as traits and drivers (i.e. inclinations, natural tendencies like being assertive, etc.).
The benefit of hiring a professional management team assessment firm is not only the fact that they are using statistically reliable evaluation tools that not all PE firms have access to, but also that they’re first creating a “leadership blueprint” to obtain a clear picture of the target company’s business, what the growth strategy is, and what criteria is imperative for a deal to be successful.
What’s delivered back to the investor? A synthesis of data to give the client insight on both the team, as well as the characteristics of each person — all of which are measured against said leadership blueprint. In addition, insight is provided on how to support the development of the team moving forward, and what practices the client should consider adopting to ensure success and execute on the growth plan. The data synthesis will also highlight weak links and/or hidden assets, and other insights into team dynamics.
Common Pitfalls & Lessons Learned For PE Success
Hindsight is 20/20. The strategy for growth can make great sense, but without any real planning, the business can start to falter. Most PE firms that don’t invest in proper management team assessment, or who don’t consider how to foster a strong relationship with their management team based on professional insight, realize this when it’s too late.
While sitting down and getting aligned on the front end (getting aligned on strategy) is critical, above and beyond that, it’s critical to think about how the deal is going to generate the value of the strategy/goal. How is the team aligned with the strategic direction? PE firms often focus on strategy and plan, and the metrics, but there is a piece in the middle around the team and the operating culture that isn’t properly pulled through and is left neglected.
The number one takeaway for investors evaluating management teams is to ensure their firm’s board is thinking broadly about the critical factors that are going to help achieve their goals. The right talent, the right operating culture and the right management team are crucial considerations that need to be made. In addition, case studies show that it’s critical to tackle issues early in the process rather than when the problem arises and when the firm is trying to reverse an issue.
Take a look at the portfolio company management team — what is working and what isn’t, and is the management team fit for purpose? Can the management team really perform and execute?
“Corporate athletes” truly are a needle in a haystack — that’s why it’s important to find management teams are operate in a specific context and are fit for purpose.
Other tips: address misalignment between management teams and strategy as early as possible. Don’t sweep them under a rub because they will fester later. There should also be some pressure on senior deal partners to look at their own skills and how they’re supporting the management teams they’re invested in. What is their role in continuing to support them? There’s a push for deal partners to be more fluent in how they engage with and coach their CEOs.
The above article is a summary of themes and issues discussed at the March 7 event. CVCA event attendees have the benefit of hearing about more in-depth case studies and receiving PowerPoint speaker presentations following events. For more information about CVCA events, visit www.cvca.ca
If you would like to submit an idea for content, contribute to an article, or are interested in submitting an op-ed, contact the CVCA’s editorial department here.