PERSPECTIVES


Playing “Moneyball” to Drive Returns

The Lancer Group and PEI announced plans to produce a series of four research reports entitled “Human Capital Moneyball- Linking Talent to Private Equity Deal Outcomes.” The reports aim to use data to vet common assumptions around the search for portfolio company CEOs and CFOs and offer guidelines for hiring executives who truly create value.

Much like in baseball, searches for C-suite All Stars are the same as they’ve ever been, and just as much of a gamble, like baseball’s previous reliance on talent scouts. Famed baseball executive Billy Beane revolutionized recruiting by focusing on data in building a team on the cheap, delivering a playoff run for the Oakland A’s for the fraction of their competitors’ payrolls.

The Lancer Group and PEI are gathering and analyzing data from recent successful transactions to discern the hidden metrics that can improve hiring decisions. Over the coming months, four research reports will be issued to offer a “moneyball” approach to human capital problems at private equity portfolio companies.

And the problems are real. PEI and the Lancer Group estimate that billions of dollars of value have been lost due to hiring the wrong person to lead portfolio companies. One private equity manager they spoke with admitted that it’s hard to discern if their latest hire is creating value until they’ve been observed on the job for months. Private equity might have evolved their financial engineering tactics over the years, but they’re often hiring talent with the same tactics as fifty years ago: paper profiles, interviews, references and assessment testing.

While the PE industry has heeded industrial psychology’s focus on “soft skills” with aptitude and personality tests, the reports seek to challenge those assumptions, along with several others. For example, the research will test whether prior private equity experience is relevant for portfolio company CEOs, or whether candidates from elite universities fare better than those from less illustrious institutions.

The data hunt will involve a deep dive into successful portfolio investments and the role human capital played in each, along with an analysis of the CEOs and CFOs that led those winning companies.

That work will be published as four research reports over the course of 2017. The first will share case studies of successful investments and their human capital component, the second will focus on research into portfolio company CEOs, the third will report data into CFOs, and the fourth will offer best practices for both GPs and LPs, given how many investors are starting to make direct investments or up their co-investment activity.

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