Seven Insights from the Value Creation “Troika”

In the hyper-competitive environment for both deals and talented executives, private equity firms that are more strategic in their approach to talent management will differentiate themselves. Private equity firms that take a holistic view of talent, and leverage and develop executives over multiple roles with an enterprise-style approach to management, will win the “war for talent.” 

With $8 trillion of new fiscal stimulus driving up valuations and over $1 trillion in dry powder still to be deployed by private equity firms, the competition for exceptional operating talent to drive value creation after an acquisition has never been tighter. If you get the “macro” thesis right on a deal, then the next driver of investment returns is your management team – the operating talent. But, how can private equity firms recruit, retain, and best leverage their executive talent to maximize returns?

Lancer Group recently brought together a unique speaker panel – The Value Creation “Troika” – with several leaders from the private equity eco-system:

  • Kristin Nimsger, Operating Partner at Thoma Bravo — Kristin has more than 20 years of experience driving growth in software and technology companies, most recently as CEO of Vista Equity backed portfolio companies Social Solutions and MicroEdge. She recently joined Thoma Bravo, which just raised $22.8 billion for investments in software and tech-enabled services.
  • Annmarie Neal, Chief Talent Officer at Hellman & Friedman — Annmarie has been driving value by improving business and leadership effectiveness through executive development, talent management, and organizational design for more than two decades. She was Chief Talent Officer at Cisco and SVP of Talent at First Data prior to joining Hellman & Friedman, which raised $16 billion for its most recent flagship fund.
  • Teresa Mackintosh, Chief Executive Officer at Trintech (a leader in financial close software) —  Teresa has been building high-performing teams and driving organizational innovation for over 25 years, working in Accounting, Tax, and Finance roles prior to becoming CEO of Trintech in 2016. Teresa drove several years of remarkable growth after arriving at Trintech, leading to its acquisition by Summit Partners (a private equity firm with $23 billion in AUM) from Vista Equity Partners.

Lancer Group Partner Victoria Lakers moderated the panel, which discussed how private equity firms can approach talent management from a “system-level perspective,” and examined how firms can hire and retain best-in-class talent through elevating the role of – and developing – executives across their portfolio companies.

Below are seven key takeaways that firms can use to drive returns through better leveraging their talent:

1. Successful Talent Management Requires A “System-Level” Engagement

While not every private equity firm leverages the power of having Operating Partners and Talent Partners, these partnerships provide strategic alignment between the investment team – focused on governance – and the portfolio company management team tasked with operational execution. Talent Partners are best leveraged as a “system-level” intervention in the value creation plan, not just for individual changes within the team. Talent Partners are most helpful when they work with the investment and management teams to take a holistic view of a portfolio company and identify the skills and talent required across the management team and at each stage of growth within the investment timeline. It is important to have a good leader – the “CEO as Hero” – but most Talent Partners believe it’s the management team as a unit, their ability to engage the organization, and the power of culture that makes a significant difference in the success of a company throughout its growth.  Talent Partners help to ensure that the mix of talent is holistically optimized in order to provide the greatest opportunity for success.

Annmarie Neal — Chief Talent Officer at Hellman & Friedman

“Talent management can be leveraged across four stages: the Buy, the Build, the Borrow, and the Exit. The “Buy” is getting comfortable that a new team has the ability to execute on a strategy.  The “Build” is coaching and developing high-potential talent to achieve greater performance for the organization. The “Borrow” is identifying talent gaps in the team, then bringing in the specific skills needed to fill those gaps and execute the investment thesis. The “Exit” occurs when talent is no longer needed for the stage of growth the company is in.” 

2. An Enterprise-Style Approach Leveraging Talent Over Multiple Roles – Helps Firms Hire and Retain the Best Executives

Private equity firms that want to win the “war” for the best talent can do so by elevating the executives within their portfolio to their own “brand”, on par with the company.  For example, Vista Equity takes an enterprise-style approach to talent management, in which executives are seen as strategic “assets.” Vista Equity values the development and retention of their executives over multiple companies and roles, and measures how many roles an executive has within Vista’s portfolio as part of their evaluation of success. This ability to leverage talented executives across companies is a point of emphasis when meeting with investors and LPs.

Private equity firms can distinguish themselves through their approach to talent, with a change in the way they invest, hire, and retain talent often leading to greater returns. An enterprise-style approach provides multiple benefits. Investors can be more aggressive with their investment thesis; if they aren’t comfortable with the management team during diligence, they can more easily replace members of the existing management team from their executive bench. Post-investment, this approach allows the investment team and management team to work together to more easily source talent with the relevant experience needed to execute the next stage of the investment strategy.

Kristin Nimsger — Operating Partner at Thoma Bravo

“As dry powder builds and deal velocity rises, demand for qualified talent increases. An enterprise-style approach within a firm with a track record of industry-specific investments allows it to attract talent of a certain caliber that a similarly-sized portfolio company wouldn’t have access to, absent the mobility and opportunity of a larger portfolio. Companies can recruit talent that is outsized to the task at hand because of the opportunity the broader portfolio provides. Not only is there a significant wealth creation opportunity for the executive with the current company, but the potential for a path that will carry them through the next several stages of their career.”

3. Hire Talent for the Next Stage of Growth – But Weigh the Costs

In fast-growing companies, there’s a multiplier effect in which early hiring decisions can have a disproportionately large impact down the road. Executives should hire people who are excited about where the company’s growth will take them as a leader, and look to hire “bigger and bolder” talent regardless of what their role would be today. Companies that hire for their current stage may constrict their future growth as the company outgrows their executives. While there are tradeoffs in terms of cost, investors and their teams should build their capability and competency framework around where they expect the company to be several years out, rather than what’s in front of the business today. In the current “war” for talent, hiring for the future with a strong growth plan can provide a competitive edge in recruiting top candidates.

 Teresa Mackintosh — Chief Executive Officer at Trintech

“We all agree that identifying the right talent is critically important. The problem is hiring talent “bigger and bolder” than your current stage demands will come at a cost. The CEO is typically the one adjudicating where it makes sense to meet that cost. Bringing that talent into the business is a challenge and there’s always a trade-off; paying significantly more than the current run rate allows is something you really need to consider carefully. There are times I’ve made that choice and times I’ve elected not to. I can say that every time I haven’t made that choice, I’ve regretted it in too short an order to make that mistake again.”

4. Focus on Executive Development to Align the Growth of the Company and Talent

Investors and executives should evaluate and manage the growth trajectories of both the company and their executives. Companies can help executives grow in step with the changing needs of the business by creating new roles and focusing on talent development to expand their skill sets. This can include creating new lines of business or functions for executives to transition into, or creating pockets of opportunity for executives to “own” areas where other stakeholders can coach and assist with their development. Executives have more development potential when they’re given a greater diversity of projects and responsibilities.

Within a private equity portfolio, firms can connect executives in similar roles across companies.  This helps accelerate leadership development by providing the opportunity to learn from peers with similar enterprise value creation objectives who have faced similar problems and devised effective solutions. Private equity firms can also leverage their portfolio companies as a training tool, using company assignments and strategic initiatives to groom and develop executives. They can also place high-potential talent in charge of a cross-organizational project or initiative with coaching from the CEO or Operating Partner. An additional benefit of this strategy is that it can minimize the number of times an executive needs to be let go due to lack of performance or inability to adapt to the changing needs of the company.

Annmarie Neal — Chief Talent Officer at Hellman & Friedman

“One thing that public companies do, that you don’t see as often in private equity, is using the organization as a university, taking an executive and using company assignments and strategic initiatives to groom and develop them in particular ways. For instance, if you have a big initiative planned – take one of your high-potential executives and have them run that cross-organizational project. You could also take portions of a CEO’s duties and hand them off as well. That is a great way to groom your talent, and it doesn’t cost much more than their time and energy in exchange for their professional development.”

5. Strong Communication of Both the “What” & the “How” is Key in Aligning Stakeholders

Communication is key to strong execution. Investors need to clearly communicate their vision to the management team. Every value creation plan needs to be translated into specific financial and operational goals, with alignment on what talent the company needs to meet those priorities. Investors and the management team must make sure there’s top-to-bottom alignment on each priority. This includes breaking down value creation goals into individual operational improvements, processes, and KPIs, not just at the beginning of the investment, but every six to twelve months. Stakeholders must think about talent not just in terms of meeting requirements for delivering operational goals, but whether they also have the tools and capabilities at their disposal – training, mentorship, coaching, direction, and accountability – to realize them. Thinking and re-thinking that system across stakeholder groups is what separates successful assets from those that struggle.

Management teams operate better with open communication and will find it easier to execute on the value creation plan when there is a unified vision of success.  Management teams must also clearly state to investors what it’s going to take from them to achieve investment goals, how they’ll need to change their organization, culture, or capabilities to achieve those goals, and how much time they need to meet the objectives. Without strong communication, the management team will often unintentionally take a different track than investors intended.

 Teresa Mackintosh — Chief Executive Officer at Trintech

“It’s not just the “what” that is important for the investment team to communicate, but the “how.” If in evaluating the investment opportunity the deal team really felt like go-to-market could be exploited much more heavily, or if they thought the sales model had more “juice to squeeze,” it’s critical that the executive team understand that. As much as what we may all agree on what growth needs to look like, it’s even more important to be on the same page as my board and understand what opportunities they saw. It shouldn’t be a guessing game. It’s not just the results we need to agree on, it’s the path to achieve them.”

6. Trust Between Executives and Talent & Operating Partners is Crucial

Just as investors can build trust and alignment with the operating executives by communicating as though they are on the same side of the table (rather than adversaries), Talent and Operating Partners will have more success when they’ve built a mutual trust. Respect is earned over time, and executives need to know that that the Partners they work with truly care about their success and the success of their business. It begins with Operating Partners, Talent Partners, and Board members establishing a communication style that is honest and open. Stakeholders that make a CEO feel comfortable, provide a safe space to discuss problems, and offer perspective and advice — or even just empathy — will help them achieve greater success.

Kristin Nimsger — Operating Partner at Thoma Bravo

Even if you’re the best CEO in the world, whatever you did to get there, something different is going to be required of you going forward and you may not have done it before. The whole point of the broader environment is to make sure that support exists. The CEO chair can be lonely, and if you have a board with a very open, candid,  honest, and safe relationship – which you do only get if you perform well – then you can leverage that relationship and feel a lot less lonely. That’s where some of the magic can happen, in that strong alignment between the board and the management team. And as the individuals grow, the business can grow, and everybody can maintain that alignment into the next stage of growth.

7. Private Equity Firms Need To Hire For Pace, Rigor, and Accountability

It can be problematic to fall back on outdated metrics such as “the seven types of CEOs” with the idea that each type has specific or predictable characteristics. However, there can be an advantage to knowing how to treat, nurture, and grow talent by viewing them in the context of certain archetypes. When recruiting executive talent, it is important to be very explicit about the expectations of private equity in terms of pace, rigor, and accountability. Working in private equity-backed companies requires executives to understand the business, customer, and market dynamics at a deeper level than in public companies. It is a high-risk, high-reward environment, and not everyone can thrive in that setting. The best executives are results-driven and capable of thriving in high pressure, change-oriented environments, when given the risks of accountability and the rewards of responsibility.

Private equity firms should assess each leadership team within each investment thesis in the aggregate, rather than exclusively on an individual level. It is the combination of capabilities driving performance more than any individual role. For firms that do stack rank their executives, the discipline can be useful, but it has to incorporate those factors related to the investment. The unique needs of each company are specific to their market, stage of growth, operational maturity, and other internal and external dynamics. That’s where Talent and Operational Partners can come in and provide the coaching, mentoring, and evaluation of talent to maximize value creation. It is as much an art as a science to pick the right management team for a business, and long-term success requires constant investment in their growth and development.

Kristin Nimsger — Operating Partner at Thoma Bravo

“If someone thinks they know what urgency looks like, they probably don’t until they’ve worked inside a private equity backed environment. I tell interviewees, ‘pay attention to how you feel inside right now because when I’m explaining this to you, if you’re excited and thinking ‘yes, I want that!’ then you should continue. If you’re feeling anxiety you should pay attention to that, because you will hate your job.’ It’s important that people really understand the nature of the environment and assess themselves as someone who will thrive rather than be oppressed or crushed by the fast-pace, frequent changes, and high degree of rigor demanded by private equity.”