Baird Capital's case for driving portfolio value via human capital strategies
We believe the top three things that an investor looks for in a company are management, management, management. Yet most private equity firms do not invest in the expertise and resources needed to effectively assess, recruit and measure their management teams. Baird Capital believes firms will have to prioritize human capital as an integral part of their investment strategies, especially as the private equity industry becomes increasingly competitive. Building and integrating high-quality talent and human capital best practices into portfolio companies can help maximize investment value – and is a key competitive advantage in today’s evolving industry.
Developing Human Capital Strategies
Human capital can have a real, significant impact on portfolio performance. The private equity industry lags behind companies in human capital management strategy – and the industry is aware of the possible performance ramifications. In a recent RHR International global survey of 100 private equity firms on human capital and management issues, 69% of respondents said poor portfolio performance is attributable to management issues. 60% of respondents agreed delays in management decisions impacted value creation. Finally, 43% said time spent with a prospective portfolio company’s management team is inadequate to prepare for a successful buyout. To make successful investments and build competitive portfolios, the private equity industry should work to build core competencies in human capital – already a familiar discipline for many companies.
Embracing “Grey Area” in Diligence
An executive’s “backability” is a traditional diligence consideration. Private equity firms often focus on making quality CEO and CFO hires, with a particular desire to hire leaders in these roles with track records of success that investors and employees will readily support. Often private equity firms do not go further to assess the other members of the management team for various reasons – they may think it is unnecessary to do so, or sometimes they may even fear that requesting this access may offend company management and potentially derail an investment.
However, Baird Capital finds it critical to meet with and evaluate the entire management team, viewing the track record of the broader group as a more telling indicator of the potential in an investment than simply looking at the CEO and CFO. Reviewing and extrapolating each executive’s track record helps private equity firms determine if management as a whole is best suited to achieve the path to value that we have planned for the company. Of course, such a mindset opens the door to more subjectivity or “grey area” in the diligence process – but it also encourages companies to be strategic about how additions to the team play into the overall growth plan for the company.
When it comes to driving efficient operation and execution once an investment has been made, assessing the unique skill set of each member of the management team against the path to value is particularly critical if the business plans to enter new markets, expand offerings or streamline operations. In this scenario, a comprehensive human capital strategy can highlight several key questions that may emerge such as: How can we accelerate management’s alignment with a private equity business model? How can we get existing management up to speed if they are not delivering value? How can we add firepower to the management team so that they can deliver on our goals?
Thus, planning for a portfolio company’s future is a true blend of investment, path to value and human capital strategies. Valuing human capital across the investment cycle helps private equity firms maximize portfolio value and efficiency.
The Road Ahead
For private equity firms, there is significant business value – and opportunity – in implementing human capital strategies and best practices in portfolio companies. Successful firms will invest in building out a human capital toolkit just like they focus on finding the next great investment opportunity.
1All data per "Human Capital in Private Equity" survey, RHR International.
Melissa Mounce is Vice President of Human Capital at Chicago-based Baird Capital, the direct private investment arm of Robert W. Baird & Co.