Corporate Culture Can Make—or Break—PE Investment Returns

Depending on who’s at a portco’s helm

Fifth Annual Private Equity (PE) Leadership Survey

At any portfolio company (portco), the right corporate culture is vital for generating the business results required by the enterprise’s PE sponsor. And a portco’s culture hinges on who’s at the helm. How? These leaders’ behaviors, beliefs, and values powerfully shape the company’s culture, or “the way we do things here.” And that culture, in turn, influences the policies, procedures, and practices in play at the portco—including those involved in executing strategy.

In AlixPartners’ Fifth Annual PE Leadership Survey, we closely examined this theme, asking participating investors and operators how they think culture relates to portco performance. After all, culture is all about human capital; in short, leadership and talent. And in today’s business landscape, potent forces (including heightened competition for the best talent) determine how strongly a portco’s culture supports—or imperils—the strategic direction spelled out for the business.

With the right talent in place, a portco stands the best possible chance of fostering the culture required to put into action the strategies essential for investment success.

Interested in participating in our annual survey? Click here.

"HOW CAN PE FIRMS AND THEIR PORTFOLIO COMPANIES WORK TOGETHER TO BOOST INTERNAL RATES OF RETURN? UNDERSTAND THE POWERFUL ROLE THAT CORPORATE CULTURE PLAYS IN INVESTMENT SUCCESS—AND MANAGE LEADERSHIP AND TALENT ACCORDINGLY."

WHAT OUR RESEARCH REVEALS:

Agreeing on human capital’s role in investment success: Both PE and portco respondents from our latest survey view the caliber of human capital as the top predictors of PE investment success—or failure. Dimensions such as senior leadership team alignment and talent management are particularly important.
Talking the culture talk, without walking the walk: Both cohorts in our study agree on the importance of considering a portco’s culture when defining a strategy for the company. And they concur that successful execution of the strategy hinges on having a culture that enables people to put the strategy into action. But . . . all too few evaluate portco culture, and those that do tend to rely on informal frameworks or approaches.
Acknowledging the need for improvement: More investors this year than last year were rated (by themselves and by their portco companies) as just average or even below average in their ability to assess culture—pointing to the need for stronger skills and/or the right tools to manage this crucial activity.
Recognizing the CEO’s crucial role in culture: Onboarding a new CEO post-deal who has a “disruptive or derailing personality” can erode investment returns. What’s more, a mismatch between the CEO and the portco’s culture can lead to not just underperformance in the C-suite but also outright failure of the portco. Hiring a CEO to deliberately change a portco’s culture can help, but CEOs should also consider partnering up with other executives—such as the chief human resources officer—to lead culture change.

VIEW FULL SURVEY RESULTS

Agreeing on human capital’s role in investment success: Both PE and portco respondents from our latest survey view the caliber of human capital as the top predictors of PE investment success—or failure. Dimensions such as senior leadership team alignment and talent management are particularly important.
Talking the culture talk, without walking the walk: Both cohorts in our study agree on the importance of considering a portco’s culture when defining a strategy for the company. And they concur that successful execution of the strategy hinges on having a culture that enables people to put the strategy into action. But . . . all too few evaluate portco culture, and those that do tend to rely on informal frameworks or approaches.
Acknowledging the need for improvement: More investors this year than last year were rated (by themselves and by their portco companies) as just average or even below average in their ability to assess culture—pointing to the need for stronger skills and/or the right tools to manage this crucial activity.
Recognizing the CEO’s crucial role in culture: Onboarding a new CEO post-deal who has a “disruptive or derailing personality” can erode investment returns. What’s more, a mismatch between the CEO and the portco’s culture can lead to not just underperformance in the C-suite but also outright failure of the portco. Hiring a CEO to deliberately change a portco’s culture can help, but CEOs should also consider partnering up with other executives—such as the chief human resources officer—to lead culture change.

VIEW FULL SURVEY RESULTS

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The opinions expressed are those of the author(s) and do not necessarily reflect the views of AlixPartners, LLP, its affiliates, or any of its or their respective other professionals or clients. This article regarding Fifth Annual PE Leadership Survey 2020 (“Article”) was prepared by AlixPartners, LLP (“AlixPartners”) for general information and distribution on a strictly confidential and non-reliance basis. No one in possession of this Article may rely on any portion of this Article. This Article may be based, in whole or in part, on projections or forecasts of future events. A forecast, by its nature, is speculative and includes estimates and assumptions which may prove to be wrong. Actual results may, and frequently do, differ from those projected or forecast. The information in this Article reflects conditions and our views as of this date, all of which are subject to change. We undertake no obligation to update or provide any revisions to the Article. This article is the property of AlixPartners, and neither the article nor any of its contents may be copied, used, or distributed to any third party without the prior written consent of AlixPartners.