There’s a great report that was recently published by Alix Partners that PE investors should really take note of. But let me save you the 10-min read with a couple of the punchlines:
In Alix’s research, 2 separate groups of PE investors and portfolio executives agreed that:
✅ A “world-class management team” is the #1 predictor of a strong exit for a portfolio company, and
✅ On the flipside, the factor that can most erode IRR is “leadership and talent.”
The data affirms that, at long last, investors and executives alike recognize something that has too often gotten lost in PE land amid the market sizing charts, the DCF models, and the creative debt financings…
Fundamentally, people are everything to the growth & success of a portfolio company.
And in a way, people are the only thing in a portfolio company.
As an old mentor of mine, Tom Voccola, used to say: “A business is nothing more than people working with other people to do stuff for people.”
As a PE investor, it can be easy to lose sight of this as our eyes are glued to the LBO model on our screen, or we’re in the heat of a purchase agreement negotiation.
But when we stop to think about what we do through the Tom Voccola lens, it makes common-sense why talent is the ultimate meta-lever among growth levers…
⮕ Does your investment thesis assume that better sales and marketing execution will result in accelerated revenue growth? Well…it is people who must execute the sales & marketing improvement.
⮕ Does your financial model assume that greater productivity will drive EBITDA? When we look past the numbers on the spreadsheet, you realize it is people who you need to be more productive. And other people—i.e. leaders—who you are relying on to create a culture and system that fosters greater productivity
⮕ Does your investment memo call for add-on acquisitions as the biggest needle-mover on investment returns? It is people who will need to find, assess, sell, integrate, and operate those acquisitions.
You get the idea.
People drive value.
People are responsible for the success—or failure—of every lever that drives growth in an investment. And consequently, in today’s day and age, investors need to understand and deploy talent as skillfully as they deploy capital.
But understanding this intellectually is no substitute for seeing its power and impact firsthand…
WHEN A B-INDUSTRY MET AN A-TEAM
A long-time mentor of mine—a seasoned multi-time CEO and all-around great leader—is a walking case-study in the power of getting the “people” part right.
Circa 2008, the tech CEO in the prime of his career was recruited to run a sleepy, underperforming, unsexy PE-backed business in what was (by almost any measure) a B-industry: ATMs.
In case you’re unfamiliar: ATMs are those dinosaurish metal boxes that you’re sure to find a millennial staring at in confusion at your local convenience store. It was the thing that existed before you could Venmo your Grandma for the ticket she bought you to the Tony Bennett concert.
The ATM business was a tough business. Low barriers. Pricing compression. Exogenous regulatory risk. Executionally complex.
At the time he took over, the investment was marked at cost, and stuck there for the first 2 years of the investment life.
I’ll spare you the play-by-play, but fast forward 3 years, and the enterprise value had tripled, leading to a wildly successful exit.
Ask my CEO buddy what changed as you look at the before and after pictures, and he’ll tell you: “Pretty simple: we got the right people into the critical roles, and executed.”
Seems common-sensical, if not a bit cliche. Although as they say, sometimes the simplest ideas are the most valuable.
But if the Alix research and this case study are right—that “a world-class management team is the #1 predictor of a strong exit“—it begs the question…
HOW CAN INVESTORS—AND EXECUTIVES—GET THIS RIGHT?
Start by looking in the mirror and asking yourself:
Is our firm building the talent-focused culture, strategy, and capabilities today that are needed to maximize performance in the future? Both within our firm and at our portfolio companies?
How do you know if you’re doing this? A few places to look ⤵️
But as I’ll talk about in my next post, getting the right leaders into the right roles—the heart of a “talent strategy”—isn’t easy.
Newsflash: Based on some research from ghSMART, fewer than 15% of all leaders excel at this. ⚠️
This, of course, is problematic when we remember that fundamentally, people drive value.
But there’s a process that we use to guide investors and their port-cos down the path towards fielding a top-notch leadership team—one capable of delivering on your investment expectations. And I’ve put together a free guide so you can start to apply this process to your portfolio companies today.
Check it out here! ⤵️