According to a new report by Spencer Stuart, HR leaders play a valuable role in helping PE portfolio companies create value. Among other things, they help establish a clear link between talent and ROI.
September 22, 2022 – The impact of private equity on the global economy is growing every year. According to a McKinsey report, the sector has grown into a financial giant with a global value of up to $7 trillion – and is therefore a major direct employer for millions of people worldwide. Like other recruiters who work with PE firms and their portfolio companies, Spencer Stuart sees both the demand and profile of HR leaders in portfolio companies continue to rise. Today, more and more private equity owners view the CHRO not only as someone who oversees the HR function, but also as a strategic business partner for the CEO, board of directors and private equity partners and operators.
So what are the unique skills and experiences that make HR leaders fit for success in a private equity portfolio firm? A new report by Spencer Stuart addresses this question, based on his client work with private equity portfolio companies as well as a dozen interviews the firm has conducted with portfolio company CHROs.
The CHRO as a value driver for portfolio companies
Spencer Stuart’s interviewees agreed that the recipe for success as a CHRO at a portfolio company is different than at a public company. In general, they face fewer compliance and regulatory issues than public companies. On the other hand, private equity owners may often be reluctant to make “big HR” investments depending on their exit strategy and need for value appreciation before a sale or IPO.
Regardless of ownership strategy, however, Spencer Stuart’s report found that CHRO can play a key role in adding value in a number of ways:
A clear connection to ROI. A strong CHRO can provide private equity owners with a clear link between the portfolio company’s talent activity and its financial success, including in areas from compensation to training to satisfaction metrics and more. Spencer Stuart’s report found that where owners are looking for rapid growth as part of the exit strategy, such as through organic means or through M&A, the CHRO can propose modest changes while clearly demonstrating to owners the value this will bring can. “If efficiency is ownership’s path to exit, the value focus — and the corresponding need for greater internal efficiency — will require a determined CHRO who can help execute the playbook appropriately to move the business forward,” the report reads.
Pioneering solutions. While less regulated than public companies, private equity owners today are increasingly recognizing the impact that strong talent can have and, conversely, the risks posed by workforce issues, Spencer Stuart’s report says. “In the right circumstances, targeted investments in talent and leadership development can deliver outsized value through increased productivity and employee satisfaction,” the study states. “Furthermore, the CHRO is critical to ensure the organization has the right focus on issues and addresses the company’s DEI needs as the general public places increasing emphasis on diversity, equal opportunities and inclusion.”
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A connection between exit strategy and talent. Many portfolio companies act with a focus on the exit. However, the exit plan can vary widely, from downsizing to rapid mergers and acquisitions to carveouts and other setups. “Each of these strategies poses a set of issues where a strong HR leader can help ensure the organization meets its goals and is ready for exit. Downsizing can be complex, requiring careful HR leadership,” said Spencer Stuart’s report. “Equally complex is the organizational and personnel management for the rapid growth of M&A. Each situation has its own distinctive talent requirements, where the CHRO is central to successful execution.”
The attributes of the successful portfolio company CHRO.
The fast-paced environment of portfolio companies rewards agile HR leaders who can work at both a granular and strategic level — while having the financial acumen to understand the business and understand how HR can help add value, the report says by Spencer Stuart. Does HR’s proposal support the company’s growth goals and does it do so within a reasonable cost perspective? Will the proposed program or training show a demonstrable increase in results? Can you connect to the bottom line and show clear value to the business and its PE owners? As a CHRO at the company said: “We’re really focused on squeezing every bit of juice out of the stuff we’ve got…. Instead of replacing a system entirely, can we get a little more value for just a small amount of extra money?”
See Also: Private Equity Firms Are Investing in Upping Their Talent Game
Among the unique career paths—and personal traits—of CHROs Spencer Stuart interviewed, there were some common traits:
A “roll up your sleeves” attitude. For most portfolio company CHROs, the mission will likely be to do more with less to fulfill standard HR functions. “While this can be challenging with fewer resources that you might find in a larger organization, the reduced number of requirements and regulations can serve as an opportunity to find innovative, value-added solutions within a shorter time horizon,” the report states . “There are often more opportunities for calculated risk-taking when it comes to finding new approaches to meet the organization’s talent needs. In our interviews, it became clear that creative, results-oriented CHROs who are willing to roll up their sleeves can have an outsized strategic impact on a portfolio company.”
Financial Acumen. In private equity, the impact is measured almost everywhere in numbers: First and foremost, how much the portfolio company can appreciate in value, often as quickly as possible, in the run-up to a private sale or IPO. Spencer Stuart’s report found that how this goal is achieved varies from company to company. Some are acquired for their untapped growth potential, others to quickly gain efficiencies prior to a sale. Unsurprisingly, the path to sale has a huge impact on what’s expected of the CHRO.
Experience as a change agent. While many of Spencer Stuart’s interviewees rose through the HR function, all had acquired a wide range of expertise throughout their careers – experiences that proved valuable in the fast-paced private equity environment. One interviewee cited her background in management consulting, where she typically worked with companies in transition, while several others credited her M&A and employee onboarding experience as giving them an appreciation for the private equity environment. These change-focused experiences provide a level of agility that serves a CHRO well when transitioning into the PE space.
The CHROs at top portfolio companies lead with creativity and innovation, understanding both the inherent challenges of the position and the breadth of opportunities it offers. “They lead from the front as functional experts, using their skills to create solutions that help their organizations achieve their goals,” said Spencer Stuart. “By earning the trust of the CEO and owners, HR can move quickly and create a following across the business, allowing them to play a strategic role that helps drive value.”
Also see: Private Equity Recruitment and What It Takes to Find the Right Candidates
Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Editor-in-Chief; and Stephen Sawicki, Editor-in-Chief – Hunt Scanlon Media