Active Talent Management-
The Ultimate PE Lever

By Tim Smith

In the past 20 years, the acceleration of private equity as a vehicle to deploy capital has been astounding. In 2000, there were nearly 7,000 US Public Companies and 1,500 US PE -Backed Companies. By 2017, there were 4,300 US Public Companies and over 7,100 US PE -Backed Companies. Today, there are over 4,700 PE firms, and 600 of those firms manage AUM in excess of $1B. According to Preqin, in the past seven years, PE firms have raised over $3 trillion and today, over $1.2 trillion in dry powder awaits deployment.


In today’s capital-abundant environment filled with frothy valuations, PE sponsors find it more difficult to drive MOIC through financial engineering. Relative easy access to capital and technology to drive operational efficiencies have leveled the playing field. Investors realize force multiplying talent is the most important lever in value creation. To drive top quartile results for LP’s, today’s best investors embrace an Active Talent Management approach to human capital.


Private equity is asking leadership teams to optimize a business, grow a business, and in many cases transform a business, all within compressed timelines. Today’s investors are faced with complex talent questions: how ready is this team to execute the investment thesis? Which members can go the distance and what am I basing this decision on? What is the REAL culture, not the perceived culture, we are acquiring? Are they ready for change? What is optimal organizational structure to scale quickly? Which functions need immediate help?

Talent is the most important lever in value creation

Top management and critical talent are key drivers of success in investments, however, less time is spent analyzing these aspects of the business over other facets. Top quartile investors employ a rigorous, disciplined approach to talent management and realize that key talent interventions often lead to significant value creation. Better returns are derived by making rapid management changes not only at the top, but also in other key areas of value creation as well as potential value destruction roles in the company. The best companies review talent placement and performance quarterly vs. semi-annually or annually.

A report from McKinsey & Company emphasizes the need to dig deeper into an organization in order to identify and manage the key roles where value is created. These roles generally fall into two categories: Firstly, value creators directly generate revenue, lower cost and/or optimize capital allocations. The second category is value enablers and/or potential value destroyers if not optimized. These roles include leaders of functions like cybersecurity, risk management, safety, and quality, etc. Typically over 60% of these roles are two to three layers below the CEO.


Traditional talent management considers critical talent as merely c-suite talent; this thinking is flawed. Active Talent Management is an approach that deploys the best talent to ALL critical value creating roles and actively assesses the performance of these professionals through assessment of KPIs tying compensation to individual MBOs in addition to other company compensation factors. As companies identify these critical talent roles, it is key to think about roles that drive enterprise value, not the people - this isn’t an exercise in identifying top performers. This approach enables investors to strategically map roles in the context of contribution to value. Rapid deployment of the best talent to the highest value roles de-risks operating plans and accelerates growth. Most critical talent is missed when you only focus on the top of the organization, value creating roles are found across the organization, not just at the top.


Active talent management addresses three key challenges:

Lack of Deep Due Diligence
  • Thinking talent alone is the key piece of the equation. You must carefully look at culture and organizational structure, make sure both are built to scale before looking at roles first, then talent.

  • Not going broad or deep enough, rather assessing just the top management team.

  • Not testing your assumptions, need to go deeper in assessment beyond face value, including psychological testing.

  • Placing a premium on what has been done vs. what needs to be done in executing the investment thesis.

  • Taking information at face value, not triangulating data points, not investing the time and money in rigorous references to get to the real story.

  • Not having the tough conversations on the front end when family is tied to the business with no real plans to make changes when performance metrics are not met.

Hiring Not Aligned with Investment Thesis
  • Not mapping accountabilities to value creation plan, not clear on accountabilities and capabilities needed to deliver target objectives.

  • Over-indexing for track record vs. fit/capabilities required to deliver on investment thesis.

  • Expecting the CEO and team to do everything. Placing unreasonable and/or unclear objectives and not providing the sponsor level support needed to help the CEO and team execute.

Leading Existing CEO and Team
  • Lack of clarity in communications, avoiding the difficult discussions.

  • Too much focus on EBITDA, not creating broader KPI’s and objective metrics.

  • Overly involved Board micro-managing a weak CEO, not having the willingness to make the CEO change, the earlier the better for investment performance.

  • Too broad agenda, not prioritizing and resource allocating around critical items.

  • Lack of succession plan, hiring a COO and giving that person all the responsibility, but none of the authority, hoping the CEO will perform.

  • CEO doesn’t have the interest/ability in driving the transformation required in the business to hit the objectives, no KPI’s to see early warning signals.

  • Overestimating ‘irreplaceability’ of the CEO.


In PE -backed companies, investing with a clear focus on talent clearly pays off. A top tier PE investor reviewed 180 portfolio companies and concluded those companies that employed an active talent management approach and linked the right talent to the critical value creating roles were by far more successful. That same firm on average replaced the CEO after 2.2 years and said only 44% of their CEO’s were able to go the distance from initial investment to exit. Of those companies, employing an active talent management approach the return was on average 2.5x when the investment hit the first year investment thesis targets. This suggests that investors who take a hands on proactive approach early and often in the investment tend to perform better than those who take a more passive approach.