Private Equity: The Overlooked Lever in the Value Creation Process

What is the single biggest way to impact a business?

What drives the enterprise value of a business?

What undermines a firm’s success?

Who makes hiring and firing decisions?


Simple and obvious, all incredibly pertinent questions, all with the same answer. People!

A firm’s ability to create and or enhance its value depends greatly on how effective and sustainable its people are. We at Livingston James would argue that that human performance has an even greater role to play in generating returns than the more transactional aspects of business. For the purpose of this article, we look at the most overlooked lever in the value creation process of a Private Equity backed business – monitoring and enhancing board and/or senior management team effectiveness.

COVID-19 is having an impact on all businesses and the wider global economy. Boards are facing unique challenges in protecting their employees’ health and building their companies’ resilience. Immediate action is critical, but boards must embrace a new agenda – one aimed squarely at what comes next. Only effective boards will be able to master the challenges.

Livingston James spoke with Dr. Sabine Dembkowski, a professional whose passion to create real, long-lasting change in organisations, combined with an expertise in human performance, psychology and neuroscience resulted in the creation of Better Boards. Their purpose is simple – to make the boards of the most ambitious organisations more effective.

“We all know that a fish rots from its head” says Dembkowski, implying that damage comes from the top and often materialises because the Board is not united or their behaviours misaligned. When working in a Private Equity environment, effectively working with borrowed capital, the financial performance of a business must generate positive results almost immediately. The board, particularly the CEO and CFO, face significant pressure from investors to innovate, report and justify. Statistics provided by Better Boards show that over the lifespan of an investment the turnover rate of a CEO in a PE backed business is over 50%, compared to only 15% in the world’s 2,500 largest public companies. It also comes as no surprise that of all the UK exits over the last two years, 69% of those businesses underwent a change in CFO during the investment period. Dembkowski said that often this comes about due to a mismatch of skillset to the requirements following a change in strategy – the ‘human incompatibility’ factor.

These statistics are eye-opening to say the least! Relationships across the Board are pivotal to the success and true value creation of the portfolio business, whether between the CEO and Chair, the CEO and CFO,  or of course that pivotal relationship between the CFO and the Private Equity house itself.  This undoubtedly encourages a different way of thinking or addressing the challenge of board and/or senior management effectiveness. Imagine what boards could achieve if they could unleash the talent around the table or at the very least, recognise where the skill gaps are?

In a 1973 edition of Psychology Review (On the psychology of prediction. Psychological review, 1973, 80, 237-257) Kahneman & Tversky explored the idea that people predict by similarity, not by statistical likelihood. They found that intuitive predictions and personal judgments often led to errors, in contrast to statistical predictions based on data which led to increased accuracy. The power of data-led insight is revolutionising business decisions. The way organisations embrace people analytics and the insight this analysis offers will be of great importance going forward. Given that management is the key enabler and driver of value creation, it is quite surprising how little effort is presently put into the systematic development of executive boards of portfolio companies. Human performance is arguably more pivotal than transactional aspects in generating the greatest returns.

Value creation drivers within Private Equity are tangible, they are something that can and will be measured. Operating Partners place significant rigour on technology advancements, operational efficiencies and clever financing to ensure the highest possible end outcome/return for the company and its investors. The above research might suggest that this data driven mantra should also be applied when assessing humans and our “softer skills”.

Boards and investors have started to recognise the need for development and are looking for new ways to achieve results. Dembkowski and the team at Better Boards have developed an advanced board evaluation tool designed to motivate, inspire and improve board effectiveness. This data-driven process helps boards and investors identify and understand what experiences and behaviours are really needed to better complement an existing management team or board. Laying the groundwork!

Better Boards and Livingston James agree that most pressing consideration for investors should be gaining an understanding of the effectiveness of their current board, encompassing the compatibility of their members, team dynamic and strategic vision. Only after this analysis, and if deemed necessary, should they then invest in a robust search and selection process to ensure the most appropriate and impactful leaders. If a business has the ability to get the best from its Board, alongside the knowledge of how to attract and appoint the right leaders, the opportunities will be endless – not to mention more cost effective in the long run.

If you would like to work with an executive search firm whose purpose is focused on helping companies and individuals achieve their true potential, whilst seeing the value in offering inclusive services to measure the impact of appointments, contact Sophie Randles at Livingston James on [email protected]

Livingston James Group is a portfolio of specialist executive search and talent advisory businesses comprising: Livingston James; Rutherford Cross ; Drummond Bridge; and Hamilton Forth.

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