Is leadership PE’s most powerful value creation lever?

Global economic conditions in 2023 seem custom-designed to cause sleepless nights for private equity. Slowing economic growth plus the danger—and in some economies, the reality—of recession have flattened demand. 

The International Monetary Fund projects 2023 growth will be just 1.2% in advanced economies, less than half of what it was in 2022. Meanwhile, inflation, though slowing from its 2022 levels, remains stubbornly and dangerously high, especially outside the energy sector. That in turn has provoked central banks to raise interest rates, raising the price of debt and reducing its availability. 

It is likely that the March collapse of Silicon Valley Bank and now the collapse of First Republic Bank and subsequent sale to JP Morgan will cause already jittery banks to be even more reluctant to lend except to the highest-quality borrowers. And some public pension funds, which had been ardent investors in PE, are reducing their commitment to the industry. 

As a result, one of the findings of our Eighth Annual PE Leadership Survey is that about half of PE industry leaders expect that deals will be fewer and take longer, and that exits will be harder and holding periods longer. This calls for purposeful, diligent, value-based leadership in deal teams, operating partners and portco executives. The focus has turned to sustainable outsized portfolio growth that exceeds the S&P 500 and delivers a strong return on invested capital, both top and bottom line over time. 

There is no quick fix, and it requires Private Equity to deeply assess the management teams of a possible acquisition during the due diligence. Part of the investment thesis needs to be whether the current team will be the leaders of the future enterprise, especially as leadership will be a key determinant of a successful exit.

Assessing the capability of a transformational leader is no easy task and requires more than a casual conversation with a deal team. Having said that, the opinions of the deal team are highly valuable but typically come with some level of bias at the expense of objectivity. Validating and enhancing those opinions with a sound, robust evaluation by trained leadership specialists provides the highest probability of success in building the executive team. We frequently use our behavioral scientists and industry experts to conduct executive assessments for key fit-to-role decisions for clients who recognize the importance of getting the right leadership for today's disrupted times.

The investing environment is getting more challenging. Making the right leadership decisions has never been more critical. Contact us for a discussion on how you can maximize this key value creation lever today.