Talent is the Only Lever
/ˈlev(ə)r,ˈlēv(ə)r noun. an object used to exert disproportionate force, as in “I used my spade to move a rock that I could not lift.”
At its essence, the purpose and function of Private Equity is pretty simple: optimize investor returns by acquiring companies at discounted valuations compared to exit potential, then maximize EBITDA through operating efficiencies in growing markets.
Familiar “levers” for value creation – debt, M&A, time – have each been significantly impacted in the current (and likely future) economic climate. Inflation, rising rates and global supply chains have pushed borrowing and operating costs through the roof. But there’s still one meaningful lever that can drive progress to exit valuation targets and returns.
That lever is talent.
Why traditional levers have become ineffective:
- Debt: The era of near-zero-interest-rate purchase financings, leveraged recapitalizations and freely accessible growth capital is over, at least for now. Cheap money-fueled valuations are no longer an option.
- M&A: Growing enterprise value through acquisition is now limited by borrowing costs and declining business fundamentals among target companies. No investor can afford to finance growth through roll-ups alone.
- Time: Private market investors continue to pressure General Partners to produce exit returns in the traditional 5-7 year window. But market conditions are extending the time needed to build valuations, and PE funds are falling behind the clock.
Why talent needs to be the strategic focus:
In the current cycle, proven CEO, COO and CFO executives are absolutely critical to achieving investor mandates for stability, risk management and prudent growth. Sponsors must get the post-acquisition executive changes right the first time. And it’s essential that these leaders have first-class functional executives to round out their organizations and move the needle to create true leverage in a down market.
Assembling the right team at the top – and by that, we mean excellent, not just good – is the one way to boost velocity toward KPIs. This in turn, creates sale value, shortens holding periods and drives higher multiples at exit.
The only leverage PE can realistically count on today is to raise the bar and drive hard for top-quality leadership talent. Failure is not an option.
- How to leverage talent to maximum effect:
- Prioritize getting your leadership team right the first time.
- Be demanding and intentional about how and where you source leaders.
- Accept that the talent search market is highly specialized. A bulge-bracket, one-size approach won’t attract the right candidates – you will miss the mark.
- Don’t hesitate to replace underperforming incumbents with capable, highly-motivated hires – especially in Product, Engineering, Marketing, Data Science and Revenue.
- Growing any business in the current economic climate requires experience and proven talent. Demand the same from your recruitment partner.
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