by Paul Lindsell, Managing Director at ThoughtSpark Agency
In truth, 2022 should be a year of great opportunity for nimble, smart private equity (PE) firms following the glut of opportunities in 2021. Banks have tightened their lending criteria in North America and Europe creating an environment in which private funds can step in to bridge the lack of relationship bank credit. Discussions abound in the industry around what will happen after the current boom, but opportunities continue to abound.
Leverage remains inexpensive, and many sectors are entering a new era of development and evolution accelerated by the COVID-19 experience. Digitalisation, new ways of working, new regulatory environments, new product platforms (such as biological drugs or cloud computing), reshoring, environmental standards, and a host of other factors are just now gaining real momentum.
At the same time, however, in an atmosphere of heightened volatility, risk has risen just as fast as new opportunities present themselves. Therefore, the investments now being made are even more reliant than usual on each PE-backed firm having the essential skills to grow and deliver rapid return on investment.
Some years ago, ThoughtSpark and Mindmetre Research published a short study on the typical skills shortages that PE firms encountered in their investments. By definition, these skills gaps are the priority areas which the PE investor should concentrate on filling, whether through recruitment or by putting in interim staff or agencies.
In order to provide an updated perspective on the relative strength and weakness of key development skills typically found in PE-backed companies at the point of investment, ThoughtSpark/ MindMetre Research has conducted interviews among Europe’s top 100 PE firms. Respondents were asked which skills they typically found to be strong in the firms in which they invested, and which were weak. Specifically, respondents were asked to grade the skills they typically encountered as ‘high competency’, ‘average competency’ or ‘low competency’.
Perhaps unsurprisingly, PE-backed firms generally present high skill levels in product development and sales. With exceptions, this is because they tend to be run by owner managers who have successfully built a business to date by creating, selling and delivering value to customers.
Room for improvement
Skills levels tend to be lacklustre and mixed in three areas: digital transformation, performance visibility, and financial strategy/ management.
The findings indicate that PE investors should be careful to scrutinise digital transformation and performance reporting capabilities in the firms they acquire, filling any skills gaps with either recruited experts or third party providers. When it comes to financial strategy and management, the core capabilities of the PE investor, through representatives at board level, have traditionally bridged this skills gap.
But there are three areas which score low for competency at the point of investment: talent management/development, growth management/scaling, and – worst of all – marketing and communications.
McKinsey research shows that organizations that align talent with their value agenda are more than 2.0 times more likely to outperform their peers and achieve 2.5 times the ROI in their first year. This skills gap implies the PE investor may well need to insist on a professionalised talent management layer being introduced, reporting on progress (talent development and management delegation) to the investor.
Scaling and managing growth – the next area of weakness – not only requires talent development and empowerment, but also a host of skills that are frequently (according to our respondents) not the natural province of founding management. Performance incentives for board directors – indeed, throughout the company – obviously need to encourage rapid development; but there is also an argument to look carefully at a commercial director position, possibly supported by independent consultants, reports directly to the investor as well as sitting on the managing board.
Finally, a key part of the growth picture is a professionalised approach to marketing and communications. Rapid growth requires a company’s successes to be broadcast as widely as possible, direct, through social media, through the press, at industry events, and so on. Both marketing leadership and staff need to have experience in rapid reputation building – helping the company to punch above its weight in terms of the sheer noise it is making to its target audiences.
Systematic marketing is required to bring the company’s value proposition to the total available target audience, unrestricted by limitations in the direct sales effort. Inexperienced marketing staff open the door to massive opportunities for wasting money and resources. Unaccountable or poorly measured marketing will not be able to differentiate between cause and effect, again wasting investor’s precious funds. Without experienced marketing direction and execution, scale growth is unlikely to be achieved. As with talent management and growth management, senior marketing staff and/or specialist agency support should have a direct reporting line to the investor, as well as the board, to transparently demonstrate alignment of priorities and empower effort towards the single goal of accelerated growth.
The current economic situation makes it even more important that all key operating skills are in place to offer the best chance of successful rapid business development in PE-backed companies.
Any significant operating skills gaps increase risk of failure. PE investors would therefore be well advised to introduce formal disciplines to monitor and manage these likely gaps in competency. A formal skills audit should always be part of preparatory due diligence and one of the first building blocks post-investment.
To obtain your own copy of the ThoughtSpark report on skills in PE-backed companies, click here.