Leadership development is key for private equity returns in a high-rate environment, especially while PE firms are being forced to spend more money to keep their portfolio companies going concerns as rising interest rates disrupt the buyout industry’s well-worn, debt-heavy playbook.
As Fitch Ratings senior director Dafina Dunmore recently explained to the ($) Wall Street Journal, “There will be a bifurcation of fund performance based on [a firm’s] ability to execute on operational improvement,” with successful firms in a high-rate environment being those that can improve their portfolio companies’ operations while those that rely on financial engineering to deliver returns being disadvantaged while debt is relatively expensive.
One way to optimize operations is to invest in the leadership team. There are a few reasons for this. First, strong leadership is essential for any company to succeed, but it is especially important for PE portfolio companies. This is because PE firms typically have ambitious growth plans for their portfolio companies, and they need leaders who can execute on these plans.
PE firms that focus on the leadership development of their portfolio companies and invest in operations in addition to their people ops will have a significant competitive advantage over their peers. These firms will be better able to generate cash flow, service debt, and achieve investment returns.
Here are some specific ways that PE firms can develop the leadership of their portfolio companies:
Invest in executive coaching and training programs. This can help to improve employee productivity, engagement, and retention while reducing recruiting expenses.
Implement lean and other process improvement initiatives. This can help to reduce costs and improve efficiency.
Invest in new technologies and equipment. This can help to improve productivity and quality.
Outsource non-core functions. This can help to reduce costs and improve focus on core competencies.
Negotiate better prices with suppliers. This can help to reduce costs and improve profitability.
In addition to the above, bespoke leadership development programs can help PE firms’ portfolio companies:
Adapt to changing market conditions. In a rapidly changing world, it is important for companies to be able to adapt quickly. Strong leaders can help companies to identify new opportunities and threats, and to develop strategies to mitigate risks.
Attract and retain top talent. In a competitive job market, it is important for companies to be able to attract and retain top talent. Strong leaders can create a positive work environment and culture, and they can provide employees with the opportunities they need to grow and develop.
Increase employee engagement. Engaged employees are more productive and more likely to stay with their companies. Strong leaders can create a culture of engagement by setting clear goals, providing feedback, and recognizing and rewarding employee achievements.
By investing in the leadership development of their portfolio companies, PE firms can help them to succeed in an era of high debt costs and changing market conditions. As Ted Bililies wrote for the Harvard Business Review, “A PE firm that builds a quantifiable, systematic, and repeatable assessment of leadership into its acquisition, due diligence, and portco management processes can use the same method to prepare its companies for sale… An asset that has exceptional value-creating leadership will fetch a better price than one where leadership is little more than an afterthought.”
Toward that end, Breakthrough Consulting Group is excited to partner with Purposeful Leadership to offer a groundbreaking, research-backed, systematic leadership development program tailored to the unique needs of private equity firms and their portfolio companies. We will be sharing more details about our framework in the weeks and months ahead.