The value of human capital perspectives in developing portfolio company management
Having the right people in the right seats – especially leaders – is crucial to any company's success. And now more than ever, it is crucial for private equity firms to meet portfolio company management early on and welcome human capital perspectives to the investment process.
At Baird Capital, we view human capital as a critical component of all phases of our investment cycle. We feel this additional perspective complements the investment team's expertise and provides our portfolio companies with a unique resource and additional perspective on their business' opportunities for growth and evolution. Human capital capabilities not only help private equity firms evaluate and build strong management teams, but also provide management teams with a more comprehensive view of their business. This alignment of interests create a powerful partnership between private equity firms and portfolio companies as they collaborate to develop a strong leadership team and build the business.
Partner Up: Including Human Capital in Due Diligence
Private equity firms can bring fresh perspective on a portfolio company's business: potential opportunities the company many not have explored, new capabilities to investigate or ways to grow. A human capital perspective is one of these lenses, and including such a function in each phase of an investment provides benefits for both private equity firms and portfolio companies.
By incorporating human capital considerations in due diligence, connecting with management teams early and often and collaborating with the company to develop its management team, private equity firms can deliver more value to portfolio companies as they work to scale their businesses.
While it is not particularly common for portfolio companies to make their full management teams available during due diligence, we believe this is a critical connection point for private equity teams. Inviting human capital professionals to participate in the diligence process is equally important.
Due diligence often focuses on purely financial matters such as identifying an attractive opportunity, modeling and establishing a path to value. Talent and development matters are often relegated to entirely separate recruiting or human resource teams, almost as an afterthought. However, because human capital perspectives complement an investment team's quantitative skill set, combining talent- and deal- focused professionals during diligence is a powerful way to provide portfolio companies with a full suite of resources to develop a strong team of their own.
Human capital perspectives may be internal resources or external experts that private equity firms can draw on to generate actionable insights on a company's management. They deliver specialized human capital tools, evaluations and best practices necessary to assess and develop leaders.
For example, a due diligence that involves human capital expertise may uncover the need for a standardized management evaluation process, enabling private equity firms to proactively create a strategic, tailored roadmap for developing the company's management team. Such insights not only inform the deal process, but also help a private equity firm truly collaborate with the company and align interests early on.
This is particularly crucial for firms with shorter investment hold periods, which may lack the personnel and/or bandwidth to drive considerable portfolio talent development. An alignment of interests between the private equity firm, portfolio company and portfolio employees is beneficial in all investments, but particularly crucial in accelerated hold scenarios. This shared focus enables private equity firms and portfolio companies to address both critical needs and compelling opportunities for growth.
Hitting the Ground Running: The Importance of the First 100 Days
The first 100 days of an investment is a crucial window for many reasons, including human capital matters. Identifying and implementing human capital strategies early in an investment can support – and even accelerate – a company's long-term growth plans.
Meeting management early helps private equity firms identify and address immediate talent needs for professional development initiatives like executive coaching or skill-specific training. Private equity firms also become very acquainted with the company's culture and unique objectives early on, which can inform talent strategies and enhance the firm-portfolio company relationship for the entire investment cycle.
A collaborative relationship also positions private equity firms to provide the portfolio company with additive talent when appropriate. For example, if the company aspires to expand into new global markets, human capital personnel can assist in delivering the private equity firm's internal resources, developing existing management ahead of the initiative, or identifying external resources to join the management team in pursuing the goal.
A Smart Investment
In addition to our internal human capital expertise, Baird Capital works with outside research firms, recruiters, executive search partners and others in our network to deliver a full suite of resources to our portfolio companies that helps build cohesive company management teams. Partnering with such professionals allows private equity firms to be more purposeful with existing resources while helping a portfolio company grow and develop.
Human capital expertise truly enhances the partnership between private equity firms and portfolio company management by including talent-focused perspectives at all stages of the investment process.
As the private equity industry continues to evolve, inviting additional perspectives into the investment process will become increasingly crucial to building strong management teams and driving competitive returns for investors.
Melissa Mounce is Vice President of Human Capital at Chicago-based Baird Capital, the direct private investment arm of Robert W. Baird & Co.