These are indeed intriguing times for the private equity sector. Conventional exit strategies are increasingly hard to access, courtesy of a subdued IPO market and pricier financing options. This, coupled with economic uncertainties and the accelerated pace of change, has made adaptability the need of the hour. These macroeconomic shifts are not just reshaping investment paradigms but also setting new talent requisites.
It’s not just the contrast with so many years of favourable market conditions; it’s also the rapid speed of change that’s making it so hard to adjust. Despite this, it was surprising, and really encouraging, to detect a level of cautious optimism among the private equity community at a recent industry conference we attended. Despite hurdles like high labour costs and limited deal volume, there are more signs that inflation and interest rates have started to stabilise.
Focus on value and resilience
In response to these challenges, we see two key movements emerging. Firstly, the return to value investing – going back-to-basics – and secondly, the need for creativity and adaptability.
The funds that have historically tended to do well in this environment were value investors. Now we’re seeing history repeat itself. It’s these funds – with a focus on business fundamentals (the back-to-basics approach) and doubling down on sectors and geographies they’re deeply familiar with – that are expected to outperform the competition, after delivering mediocre results in the boom market.
Across the sector, a lot of funds are pivoting away from riskier opportunities and targeting more resilient mid-market deals and niche geographies. Increasingly in demand are markets like Germany’s Mittelstand, the Nordics (the ‘Silicon Valley of sustainability’) and France, where relatively large numbers of small businesses create exciting openings for consolidation and roll-ups. There are also remaining pockets of high growth in countries like India. From the sector standpoint, particularly attractive are some of the technology sector verticals (like Fintech) and Healthcare, which offer exciting potential given their non-cyclical nature and current macroeconomic and demographic trends.
In a break from plain vanilla leveraged deals, there’s much more creativity around – and not just where funding is concerned. Rather than buying brand new businesses, funds have refocused on bolt-on acquisitions through their existing portfolio companies, as well as collaboration with other funds and strategic players. There is also a noticeable trend towards evergreen structures, favouring 10 to 15-year holds over the traditional five-year cycle, signalling a broader move towards more sustainable and long-term strategies.
The recurring theme of talent
Alongside the sense of cautious optimism that ran through all the conference sessions, there was also a common theme around talent and the significance of aligning the right talent with value creation.
It’s as true today as it’s always been, success hinges on people. This involves getting the right management team dynamics, mastering the art of collaboration and deeply understanding the investment thesis – from a talent and not just an asset standpoint.
The pandemic’s aftermath has made this alignment even more complicated. Whereas funds once had a clear understanding of the whereabouts and working conditions of the teams within their acquisition targets, today’s environment is marked by greater flexibility. For private equity firms operating in this landscape, it means navigating a host of complex compliance, tax and cost considerations. Consequently, both pre-deal due diligence and post-deal strategic planning have become notably more challenging.
A forward-thinking talent strategy
Despite significant strides forward across most of the PE funds, it’s still fair to say that in many situations there’s not enough maturity and robustness in how funds look at and deal with talent issues.
From the outset, and throughout the entire search process, funds need to be crystal clear on what they are looking for in their leadership teams and why. The why should be tailored to the specific business, rather than based on what had worked before in other assets, in order to hire ‘fit-for-purpose’ leaders. A clear and precise brief should then be followed by a rigorous selection approach, making full use of advanced competency-based tools like scorecards and psychometric profiling.
The interview process needs to be well thought through, neither too stretched nor too short. All interviewers – four to five, maximum – need to have a specific role in the selection process and assess defined competencies, pre-agreed ahead of the interviews. The fund and their search partners need to be fully aligned from the start and they need to work to the same set of competencies and required behavioural traits, sharing information in real time and being ready to course correct, without a delay, as required.
We’re seeing leading funds become more laser-focused in their recruitment processes; they take time upfront to understand exactly what they need and decide on the kind of leader they will look for, long before they start the actual search. The rest of the industry still has some work to do on this front.
Targeted processes get results
In our previous article ‘Taking the lead in Private Equity’, we discussed the traits that make leaders truly effective in this dynamic environment, highlighting how vital it is to understand exactly which qualities will generate the most value. Being clear on what type of leadership is required will streamline the selection process, making it quicker, more efficient and aligned with the organisation’s future needs.
A long-term view is essential when crafting a talent strategy that can adapt to market shifts. As the sector evolves in new directions, the onus is on understanding the much more complex combinations of talent that will be required. That means finding leaders who not only have sector-specific expertise but also possess the requisite regulatory and technological acumen. Now more than ever, it’s crucial to avoid hiring cookie-cutter executives with prior private equity experience. In a world where a one-size-fits-all model falls short, diversity in leadership — in every facet — emerges as a foundational pillar for success. The more diverse the leadership team — in terms of gender, race, skills, experience — the more successful it will be.
At Redgrave, we leverage our deep understanding of the private equity industry. We’ve helped funds hire talent through bull and bear markets, across all types of investments, geographies and industry sectors. Our adaptive and strategic outlook enables us to identify leaders who align perfectly with your investment strategies and corporate ethos.