Private Equity Advisory
The right team makes all the difference.
When private equity firms close a deal, they are betting their successful exit on outstanding leadership. Typically they spend hundreds of thousands of dollars on outside counsel (legal, financial and strategy consultants) as part of their due diligence. Yet, they miss critical information that significantly handcuffs their ability to meet their target timeline for a successful exit: true insight into the leadership and talent structure of the organization.
For a deeper understanding of the scope and impact of the absence of a rigorous human capital evaluation, we conducted research across hundreds of PE portfolio companies and found CEO and other leadership changes well beyond the close.
In fact, a full 2.3 years beyond the close, on average.
Further research shows that changing leadership teams midstream is directly correlated with measurably inferior outcomes in terms of prolonged investment holding periods, suboptimal fund and deal IRRs (internal rate of return), and a lot of avoidable turmoil.
This disquieting finding of the negative impact resulting from the considerable lag time between date of investment and key changes in leadership is private equity’s metaphoric “elephant in the room.”
As a part of our due diligence on an important acquisition, Epsen Fuller conducted a thorough Management Assessment, which became invaluable in our decision, as well as giving us a roadmap to grow the business post acquisition. Very insightful, and actionable, the deliverables were outstanding.
CIT Equity Partners
If leading deal partners want to change a company’s management, they [should] do so early in the investment. In 83 percent of the best deals—but only 33 percent of the worst—firms strengthened the management team before the closing.
McKinsey & Company
Too often dealmakers gather reams of financial, commercial and operational data, but their attention to what we call human due diligence – understanding the culture, [leadership] and the roles, capabilities and attitudes of its people – is at best cursory and at worst nonexistent.
Our research shows that whether you keep the original team or change the team, it’s best to do it at the outset of the deal – if you have to change the team midstream, it’s associated with demonstrably inferior outcomes, longer hold periods and lower IRRs.
EY Ernst & Young
The new human capital due diligence
What can you do to embark on your investments with deeper insight into the current leadership team and talent structure so you can achieve your desired holding period?
It is the “Leadership Quotient” or LQ℠ that reveals the organization’s talent structure, its human capital strengths and weaknesses, providing the requisite transparency for solid decisions to be made on the leadership team, the culture and the alignment of talent with the overall strategy.
As advisors to top PE firms and their portfolio companies, our consultants conduct a broad and deep sweep of the organization, forming a clear picture of the company’s leadership and talent landscape, its LQ℠.
Only then may conclusions be drawn that lead to appropriate and timely action, i.e. actionable insight. Using this approach to guide the “retain or replace” decision pertaining to C-suite and other senior-level leadership can make a significant impact on reaching the desired exit multiple faster, and with less pain along the way.
Assessing the Leadership Quotient