How do you increase the probability of achieving targeted returns on your investments? Particularly in a relatively low-return environment. Can you increase your returns while also decreasing your risks? Prequin’s Key Findings: 2019 Global Alternative Assets Reports are posing these same questions. Everyone you ask has a perspective and there are no silver-bullets or sure-fire methods. However, you can take steps to significantly improve your chances of success, particularly where human capital is concerned.
The role of human capital in deal-making and value creation was center stage at the recent ACG Intergrowth Conference, Hurray! But, the stats haven’t changed yet – 70-90% of transactions fail to achieve their intended deal outcomes, in large part due to issues related to people and culture.
In a recent TV interview, Doug Claffey, CEO of Energage said he believes that employee engagement and culture are among the final untapped opportunities for improving business performance and increasing enterprise value.
We are excited to see greater interest in human capital as levers for improved long-term operating and investment outcomes, and as a focus to identify and address potential risks.
Our friend Michael, who’s a seasoned private equity investor, recently lamented that the industry’s traditional focus on meeting a target company’s principals for dinner and drinks, and evaluating pensions and employee benefits as the primary sources of people-related due diligence are insufficient, at best.
In fact, at the 2019 Total Impact Conference, a number of the attendees talked of finding ways to better understand human capital risks and opportunities in their targeted investments. At least one limited partner representative said they used Glassdoor ratings to help guide investment decisions!
Michael shared his struggles with leadership following deal closings. “How”, he asked, “can you know whether someone is likely to do well, find satisfaction with, and contribute to building a truly successful organization, before you sign-on-the-dotted-line?” It’s a great question, which led to more than an hour’s worth of conversation. Together, we unpacked the various issues and concerns, and agreed that getting at the right data, information, and details requires both quantitative and qualitative approaches to understanding an organization. A conscious search for similarities, unique differences, and opportunities for capturing and preserving value is imperative. That said, success, especially leadership success, is often contextual.
Imagine, for example, that you are acquiring an organization built upon the principles of innovation, individual autonomy, and bottom-up decision-making. This company is relatively small, customer-centric, and employs mostly young, self-taught programmers. The founder, Tom, whom you would like to keep and grow following the acquisition, is a successful serial entrepreneur – he has hand-selected and groomed his team in his own image.
At closing, you expect that Tom will take a long-term position with the new organization as COO, reporting to your most successful operating partner, Lisa. Lisa, runs a tight ship. She holds weekly operations and strategy review meetings, expects that she will be involved in most, if not all, of the business decisions. She has a long history of building organizations, but has never led a tech-innovator company. Her teams are most often made up of highly talented, well educated professionals, mainly from magnate colleges and universities.
Lisa and Tom will be tasked with meeting their currently customers’ demands, growing the business more than 15% per year for the next 5 years. They are expected to accelerate their product innovation activities, and integrate these two businesses quickly, with an eye toward additional acquisitions over the next 3 years. This is a recipe for success – two organizations with successful track records, headed by such strong leaders. What could go wrong?
Long-term value can be gained or lost in situations like these. Success is a function of a complex set of factors, some of which are fairly easily identified if the right questions are asked; others are much more difficult to detect. Fundamentally, context, not just talent and capability, can enable achievement or create tangible risk.
The ocean couldn’t be boiled over lunch, but while we talked through hypotheticals like our Tom and Lisa scenario, we quickly agreed upon a number of impactful ways to increase the odds of a healthy outcome. These 14 steps can help to avoid potential derailers, minimize risk, and set the stage for meaningful growth and accomplishment. Many of these also contribute to higher levels of employee engagement and job satisfaction for members of the leadership and employee teams.
Online rating tools such as Glassdoor, pension and benefits due diligence, and dinners with the leadership teams of prospective acquisitions may be important aspects of your information gathering process. However, they are individual tools in what should be a much larger toolkit. Adopt a comprehensive approach to human capital due diligence, paired with additional strategic and tactical activities. When you do, you’re sure to reduce your risk and achieve increased value.
We’d love to help you address your challenges and opportunities.
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