The Changing Landscape of Private Equity: The Role of Leadership Development in Value Creation

Rianne Silvey | 24 January 2024

In the PE world the traditional focus on financial engineering and rapid value creation has given way to a more nuanced approach. PE firms are relying less on eventual buyers to develop leadership within their portfolio companies, recognising the need for strong leadership as a primary driver of success sooner, rather than later. Several factors have contributed…

Rising Interest Rates and Debt Capital Costs:

When interest rates rose, the cost of borrowing increased. This impacted private equity firms because they often used debt financing to acquire companies. Higher interest rates have made it more expensive to finance these acquisitions, reducing the potential returns on investment. Therefore, to maintain or achieve desired returns, PE firms need to focus on improving the operating performance of the companies they acquired. Including implementing cost-cutting measures, optimizing operations, and driving revenue growth to offset the higher cost of debt.

Merging Smaller Companies:

Many PE deals now involve consolidating or merging smaller companies to create larger and more competitive entities. These mergers can be complex and require exceptional leadership skills to navigate successfully.

Longer Holding Periods

Private equity firms traditionally aimed to buy, improve, and sell companies within a few years. However, the trend is shifting towards longer holding periods. This requires a stronger emphasis on operational excellence, strategic planning, and ongoing improvements in the companies’ performance.

All these factors elevate the importance of strong leadership and capable management teams as operational improvements take centre stage in PE-owned firms.

The Role of Human Capital Partners

One way PE firms are addressing the centrality of leadership to enhance value creation is by appointing a Human Capital Partner. They will possess expertise in hiring, executive development, and coaching and play a crucial role in evaluating and improving leadership within portfolio companies.

At NSCG, we specialise in providing these crucial services. We collaborate with numerous PE houses, mainly in the UK and the US, offering, initially, pre-deal human capital due diligence projects. This involves assessing key individuals within target companies, such as the CEO, CFO, and other senior leaders, using psychometrics and competency interviews to gauge their suitability for the post-deal context.

Our ongoing partnership with the PE house results in a deeper mutual trust and knowledge exchange. This often leads to us being invited to undertake various other projects, including the assessment of key hires into portfolio companies, integration workshops, strategy sessions, and coaching for new appointees to maximise their chances of success. Additionally, assessment across the portfolio and within the PE firms themselves, including Investment Partners, to ensure the entire ecosystem is primed for success.

PE firms are recognising the need for Human Capital Partners even more in today’s climate to enhance value creation within their portfolio companies. If you’re interested in exploring how NSCG can assist your PE firm, find out more about our human capital partner services, or if you’d like to speak to one of our consultants, please contact us.

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