Partner & Managing Director, New York
NEW YORK (March 31, 2021) – With the pandemic, racial injustice, and extreme environmental events accelerating disruption in 2020, PE investors and portfolio company (portco) executives have had to rethink many aspects of how they run their firms. While the importance of people and their impact on private equity strategy and returns has been growing over the past few years, both PE investors and portco respondents in AlixPartners Sixth Annual Private Equity Leadership Survey agreed that human capital was the top priority for generating value in times of disruption.
“In this year’s survey findings, we see that leading through disruption has accelerated the importance of human capital in creating value. That’s not surprising because how a company leads and manages its talent can not only make or break its ability to survive crises but also determine whether it will thrive in the aftermath,” said Ted Bililies, Ph.D., founder and global leader of the Transformative Leadership practice at AlixPartners. “There are clear signs of the acknowledgment of human capital’s vital role in private equity success. One of the fastest-growing jobs in PE firms isn’t deal partner, it’s human capital partner—a role often filled by former CHROs and organizational development and talent management experts.”
When asked which stakeholder group has increased most in priority because of the disruptions of 2020, 79% of PE leaders and 67% of portco executives named employees. In addition, more than half of PE respondents said that the importance of human capital due diligence has increased during this time of disruption—more than commercial and operational due diligence.
Questions about ESG as a priority elicited mixed responses. On the one hand, a weighted average 36.5% of both respondent groups reported that ESG factors are “not at all” or only “slightly” important in selecting and crafting investment theses. On the other hand, 56% of the PE investors acknowledge a greater interest in companies that embrace ESG standards. This suggests slower than expected emerging support for ESG initiatives, alongside a lack of clarity of the range and meaning of these initiatives.
When asked how PE investors could influence social justice issues during the remainder of 2020 and throughout 2021, a surprising 67% of the PE leaders and 50% of the portco CXOs declined to answer. This limited response rate could be explained in several ways—including a lack of endorsement of ESG and a lack of substantive directional focus on ESG from investors.
Despite recent disruptions such as climate change and systemic racism, the majority of PE (60%) and portco (85%) respondents reported that they are not revisiting their firms’ purpose as a result of these events. Specifically, aside from paying taxes, PE respondents cited providing opportunities for underrepresented groups as the second-most-important activity that firms perform for society.
“Instead of treating stakeholder capitalism as a PR talking point, investors and portcos must integrate that stakeholder capitalism into the PE ecosystem,” Dr. Bililies said. “For investors, simply weeding out companies that engage in certain activities to shape their portfolios will no longer cut it. Nor will merely issuing sustainability reports every year. PE firms, like any other investor group, are competing for capital, and ESG funds count among the fastest-growing types of investment. To attract that capital, PE firms must clearly articulate their ESG strategies and explain how these strategies influence their investment-decision-making process.”
During disruptive times, PE and portco leaders must balance attending to urgent matters while also ensuring that longer-term objectives are met. Both respondent groups agree that transformative leaders should concentrate most on strategic prioritization, followed closely by stepping up their communication and transparency.
Dr. Bililies summed up, “In moments of crisis, employees, shareholders, boards, and other external stakeholders look to leadership to make difficult decisions, clarify priorities, set expectations, and transparently communicate a path forward. Making wise strategic and organizational decisions with integrity and transparency can be challenging in the best of times. Given the need to master new leadership capabilities while also managing heightened levels of complexity in their roles, it’s clear that many portco execs must alter their leadership styles. Such alteration did take place in 2020—not only among company executives but also among PE leaders.”
The AlixPartners Sixth Annual Private Equity Survey, conducted in conjunction with Vardis, the global private equity executive search firm, was administered October through December 2020. There were 122 total respondents comprised of 61 managing directors and operating partners from PE firms and 61 senior executives (primarily CEOs and CFOs) from portfolio companies. The largest share of portco respondents were with companies with annual revenues of $100 million to $500 million. The majority of PE firm respondents reported their firms’ assets under management were less than $5 billion.
AlixPartners is a results-driven global consulting firm that specializes in helping businesses successfully address their most complex and critical challenges. Our clients include companies, corporate boards, law firms, investment banks, private equity firms, and others. Founded in 1981, AlixPartners is headquartered in New York and has offices in more than 20 cities around the world.
Director, New York