Private equity (PE) firms are often unfairly perceived as takeover specialists, only concerned with numbers on a spreadsheet and finding exit strategies that lead to big buyouts. Employees of a PE firm’s portfolio companies also fear layoffs, thinking the PE firm will ultimately “get rid of everyone” in preparation for selling off companies.
But PE firms’ approaches to hiring and managing talent tell a different story. A recent study conducted by Ernst & Young and Private Equity International (PEI) found that 51% of PE firms believe retaining talent is the top issue to remain competitive in the marketplace, while 53% ranked developing personnel as one of their top objectives over the next two years.
180one has witnessed this emphasis on talent firsthand in our work with several PE-backed clients over the past few years. Today on The Water Cooler, we look at how PE firms are having a positive impact on the recruiting world in the first article of new series about private equity and executive search..
While corporate ownership in the US has shifted from public to private over the past few decades, PE firms have also evolved how they bring in and manage their portfolio companies. A 2016 article from Harvard Business Review explains how, in this new phase of PE ownership, firms must bring more than financial discipline and strategic expertise to their portfolio companies.
PE firms experience both winners and losers among their investments. When looking at their portfolio companies’ performances, they have started recognizing the importance of talent in creating a strategic advantage that leads to success. Today’s PE firms realize that they aren’t just buying a legal entity when making new investments; rather, they also acquire a management team and organization of people equipped to execute the company’s plan.
Now PE firms have begun to place more value on acquiring and retaining talent, strengthening HR practices and innovating the organizational operations of their investments in order to keep that strategic advantage.
Engaging in their portfolio companies’ hiring processes used to mean that PE firms would leverage their network to identify talent or be actively involved in interviewing and selecting candidates. Today’s PE firms, on the other hand, emphasize the importance of strong recruiting and HR processes by investing in and sharing best-in-class hiring practices across their portfolio.
PE firms originally drove savings by consolidating shared resources such as Audit, Banking and Legal services via contracts with preferred vendors. Now they take a similar approach by investing in Talent Management services that they deploy across their portfolio when needed.
This approach provides smaller companies who possess nascent HR functions access to new tools and practices, including behavioral assessments to truly evaluate candidates and compensation benchmarks to remain competitive in the marketplace. PE firms also invest in building relationships with executive recruiting firms, vetting these firms and negotiating favorable terms on behalf of their portfolio.
Injecting this knowledge and sophistication into their portfolio ultimately evolves the holding companies’ hiring practices and offers them a “leg up” in attracting top candidates.
PE firms invest in dozens of companies, giving them insight into C-level leadership across a variety of organizations and industries as well as a plethora of expertise in recruiting the right candidates for those positions.
Through their previous experiences, seasoned PE executives are able to identify the appropriate balance between soft and hard skills needed in a C-level candidate and often have a better understanding of the existing talent pool. Although they may not make the final hiring decision, PE firms nevertheless are able to advise their portfolio companies during the recruiting process and ensure that they select strong leadership.
As PE firms shift their focus from financial fixes to company transformations, their emphasis on talent management and sophisticated processes has allowed their portfolio companies to evolve as well, boosting them to a new playing field when it comes to competing for candidates.
Interested in reading more about PE Firms and recruiting? Consult these resources:
5 Reasons Strong Talent Management is a Top Priority for PE Firms | How Private Equity Firms Hire CEOs
And don’t miss 180one’s work with some of our PE-backed Clients: Columbia Distributing | Owen Equipment | OFD Foods