While we seem to be living in an age where one worldwide crisis follows another – putting pressure on the global economy – the private equity sector continues to thrive. In fact, private equity deal-making reached historic heights in 2021, as transaction volume reached $1.2 trillion (an increase of 111 percent on 2020), representing 20 percent of overall global M&A volume.
But as the PE investment sector continues to grow, it is also changing. For one, as competition increases, PE groups are looking into sectors and brands beyond their typical scope of traditional PE interest a decade ago.
More importantly, the way PE firms are going about their business post-acquisition is changing too. This is because, to guarantee returns these days, PE firms can no longer rely purely on financial engineering. Diligence is tightening, scrutiny is intensifying.
PE firms have become more embedded in (and taken more responsibility of) the way their acquisitions do business. This means they’re focusing more on monitoring HOW the brands they’ve invested in do things – as opposed to simply looking into WHAT and WHY they do it.
Operational expertise and excellence has become critical to growth and profitability, particularly when it comes to the tech market. In other words, PE firms are in there getting their hands dirty as well.
So, how do PE groups ensure operational excellence, which then gives them that all-important ROI? By ensuring that their newly acquired firm has an A-Team of leaders. A top team that is committed to achieving a return – and actually knows how to provide it.
Grow, grow, grow your boat
A company that has been acquired by a private equity firm will undergo seismic change – especially for its leaders and employees. That’s the point. The team, if it wants to stay in place and be promoted to the next phase of growth, will need to transition its ethos and mindset. Overnight, it needs to mature and move from a start-up or early-stage growth attitude to a results-are-everything approach in which the target is to expand, get more scope, scale and add complexity.
And even if the existing team stays put, it is highly likely that new, game-changing blood will be brought in to accelerate crucial roles and oversee pivotal activities.
So what do PE groups demand from their leadership teams? What attributes do they require from the people they choose to deliver the return they seek?
Here’s the Good Soul take on what PE groups seek in their talent:
1. Can drive organic growth in a brand
When PE firms look for acquisition targets, they research a multitude of things. Market position, sector nuances, cash flows, industry trends, competitive advantages…it’s a long list which often depends on the buyer’s priorities. But there's one thing that every PE will look for both pre- and post-acquisition: untapped growth potential.
Whether this untapped growth can be unlocked by creating a scalable sales engine, identifying a new market or investing in R&D, there needs to be a team or person driving it. Therefore, a proven track record in driving organic growth – even if in an entirely different sector – is something PE groups love to see.
Those with undeniable experience in driving rapid growth, a deep commercial background and an understanding of how to build and drive sales will often be a preferred choice for investors.
2. Are metric and data-driven
It’s all about the numbers. And some numbers are more equal than others.
If you want to be a successful leader in a PE-controlled brand, you must understand equity value creation and what PE firms look for in an investment – in particular, EBITDA growth, debt reduction, and cash flow.
Being able to read, understand and then translate data to steer actions is a must. It sounds obvious, but knowing and understanding the financial metrics of the business and being able to use those details to guide future actions (and ensure you’re making the right decisions) requires more than just being able to read a bank statement and to see how much there is left in the account. Without a good head for metrics and data across all operations, it will be hard to be in control of the crucial drivers of profitability and cash flow.
3. Have a sense of urgency
PE firms aren’t usually in for the long-haul. While holding periods in PE have increased significantly since 2010 – rising from an average of 3.8 years to 5.4 years – the time in which leaders need to secure returns is a short one.
To succeed in a PE environment, leaders need to have clear goal orientation skills and an extremely high sense of urgency. There simply isn’t time for paralysis by analysis. Individuals who aren’t performing as expected under a goals and data driven CEO could quickly find themselves removed and replaced by people who will act fast and get the job done in the time specified. No procrastinators, please. Too casual - move on!
4. Combine strategic and systems thinking
PE firms rely on management teams which are able to identify and map out fresh, faster-growth courses for the companies they buy. This means that strategic skills are of the essence. But it’s one thing to map something out and to navigate it accordingly. Being able to steer the process from A to B, in order to reach the destination, is equally important.
Therefore, those working for PE companies will need to be able to both plan a growth strategy and then identify and arrange the process and people needed to achieve it. In short, someone who is able to see both the big and all the smaller pictures.
Do you check all four boxes? Want to find out more about opportunities within PE-owned brands?
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