The need for a sophisticated approach to human capital within private equity firms has become increasingly prominent. As leaders in executive search, we at JM Search interact heavily with the human capital leaders of our private equity clients. Now a fixture in PE firms, the role of the talent partner has evolved – often extending from human capital diligence to value creation planning, executive search, and capability building.
We sat down with Alice Mann, Founder of MannPartners, to gain her perspective on what factors are shaping the role of Private Equity Talent Partners. Alice previously served as a Partner at Sentinel Capital and an Operating Partner at Blue Wolf Capital. She has spent more than 25 years advising senior executives on building leadership teams, developing talent strategies, and designing organizations to achieve strategic priorities.
The Origin of the Talent Partner Role
What do you think prompted the growth of the human capital function within PE?
The PE industry has grown rapidly since the 1990s – both in growth and in volume of PE firms and new deal transactions. But the PE industry is still relatively young, and most PE firms today have only been around for a few decades.
Under the market pressure of increasing competition for returns over the last few decades, many firms have evolved and expanded their investment strategies beyond financial engineering to drive value creation through operational improvements and growth strategies.
In the mid-2000s, PE firms began further differentiating themselves by emphasizing their commitment to building strong management teams – because those operational improvements and growth strategies also required strong portfolio executives.
By 2010 (post global financial crisis) the growing focus on and competition for executive talent led to the rise of the talent partner role in PE firms.
In the past decade, the PE industry has witnessed a growing trend towards professionalization with some founder-led firms experiencing succession and maturation of their organizations. As a result, these firms have increasingly embraced best practices from other industries in organizational development, talent management, and human resource management. Today, the PE industry is still in early innings with many human capital best practices and tools for driving strategic value creation.
When a PE firm creates a Talent Partner role, what responsibilities are firms typically looking for that individual to own?
Many firms still look for a Talent Partner to focus on executive recruiting, and to some extent leadership assessment during diligence and hiring, as well as building HR capabilities for the portfolio companies and sometimes the firm. These activities require technical expertise that deal teams do not typically have or prefer not to spend a lot of time learning.
A few PE firms stand out by putting human capital at the center of their strategy. They do this by integrating the human capital team with the deal teams and operating partners to drive value throughout the entire investment lifecycle.
The PE human capital function can focus on four priorities that follow the investment cycle: 1) diligence assessment on individuals, teams, and organizations, 2) post-acquisition management onboarding, value creation and organization plan alignment, and ongoing execution of that plan, 3) new executive hiring, and 4) shoring up the necessary HR capabilities.
Most portfolio companies require more than just having the right leadership to drive high returns in a short timeframe with greater efficiency. Even if the portfolio company is largely focused on growth through M&A, that growth still requires building a platform that can efficiency bring on new teams with different people, structure, incentives, and culture.
The Profile of a Talent Partner
As you look at the profile of Talent Partners within the PE industry, what are the backgrounds you most commonly see? Can you give examples of each?
The most common background is still the executive recruiting profile, then you have previous HR executives, leadership assessment consultants, and finally some management consultants. Each of these backgrounds offers a different skillset.
With PE Talent Partners coming into their position with different backgrounds, what are the strengths of each respective background?
The executive recruiting profile is interesting because the talent partner role is a not a pure recruiting role. It’s more of a recruiting concierge role, which typically entails managing the executive recruiting network, processes, and key stakeholders for hiring new leaders into portfolio companies. So, while someone coming from executive search can quickly take work off the plates of deal teams, it may not be the most strategic priority of a human capital leader. As a result, firms of scale will often hire a mid-level VP to run the executive recruiting processes.
The HR executive background brings senior generalist experience across assessment, recruiting, and organization effectiveness, but transitioning from bigger company corporate HR to the fast-paced, less-orderly middle-market PE world can be a challenging.
The leadership assessment profile brings depth in diligence and hiring decisions, CEO advisory, and can be most effective if the leader has done organization assessment and development. However, they must learn executive recruiting and HR so there is a decent learning curve that can take some time.
The broader management consulting background brings depth in diligence and hiring decisions, CEO advisory, organization assessment, development and design, as well as some HR best practices. Yet, leaders with this background must learn executive recruiting from scratch so again, there is a learning curve there.
Each background offers set strengths, as well as areas of development. Finding the right fit for the PE firm in terms of expertise is critical in designing the role and ensuring the success of the human capital function.
From your perspective, what skills and experience/background should be prioritized?
The focus on human capital is still largely on leadership assessment, selection, and hiring – i.e., “How backable is the CEO and management team? Who do we need to hire?”
Most PE portfolio companies need more than just the right leadership to achieve high returns quickly, increase efficiency and improve margins.
The human capital priority that drives the most strategic value but gets the least focus from most PE firms is the post-acquisition onboarding and alignment with management. Ensuring alignment around the value creation and organization growth plan, followed by advising the CEO and team on implementing that plan in the first year of the investment is critical. This type of expertise should be prioritized.
Another underestimated strategic priority is developing leading human capital indicators across the portfolio to equip deal teams with the tools to identify performance issues, and act quickly to address them before they affect returns.
Shaping the Talent Partner Profile
The strategic approach for Talent Partners differs from firm to firm. What have you found impacts the human capital strategy?
The CEO and CFO replacement rate of the firm. If the PE firm’s approach to human capital is to install new management, then it makes sense to focus largely on leadership assessment, selection, and hiring. However, many PE firms buy companies with founders and management teams that they need to keep largely intact. This requires a different human capital approach – one that is focused on building relationships and aligning with management on the strategy, organization capability-building, hiring one or two new executives, and then supporting the management team with clear goals, roles, decision-making processes, and incentives.
When it comes to developing best practices around human capital, what factors have you found influence each firm’s approach?
The size of firm, where the firm is at with founder succession and professionalization, if the firm has a single sector focus or a broader focus, the geography of the firm, if the firm has a clear investment strategy to grow and/or compete with strategic approach to human capital, and the extent to which the firm buys founder-led companies and backs intact teams vs. replaces and builds the executive team.
The Talent Partner is a relatively new role in Private Equity. What do you expect the role looks like 10 years from now?
As PE firms expand and bring in new investors with their own strategies and interests, the PE firms must develop clearly articulated investment strategies for growth, and align their leadership, goals, roles, decision-making processes, incentives, and specialized talent to that strategy.
The reality is that the PE industry drives returns through companies that are led by people and around 50% of portfolio company operating expenses are usually spent on those people. The performance of those companies is largely driven by how well people are organized and led to deliver on the companies’ specific value drivers.
Historically PE deal partners and operating partners have focused vertically (and often as generalists) on sourcing, closing, and overseeing each deal. I believe the future of the human capital leader will be to bring a specialized strategic skillset and focus horizontally across the portfolio, working together with deal partners and operating partners, to professionalize the PE firm’s human capital capabilities and processes for driving higher and more consistent returns across their entire portfolio.
A very special thank you to Alice Mann for her insights and contributions!