As I’ve watched firms ebb and flow over the course of the last 20 years, finding ways to be innovative in the Private Equity context really hasn’t been that easy. The industry generally runs along a well-defined set of rules and expectations and it’s rare that we see any truly fresh ideas or approaches. To the contrary, we typically see firms that are stuck in a “This is the way we’ve always done it” mentality from which it’s hard to break free. In support of that, as it relates to current and future relationships with LPs, I’m sure there are many good reasons not to take any risky positions related to a firm’s structure, its fees or its public profile.
We saw this in action when we watched many firms be slow to adopt a well-defined portfolio operations initiative. Many firms sat on the sidelines until the swell of market support (and push from their own LPs) made them dive in to catch up with their peers. What is today a function that we take for granted, was met with wide resistance in the early days.
As such, when I see a firm do something out of the ordinary the nerd in me comes out and I get pretty excited about it.
I won’t name names (yet) but I’ve stumbled recently into just such a scenario with a wonderful middle market firm that I’m proud to call a multi-time client. They’re a traditional PE shop with a very focused investment strategy, a long track record of success and a culture of respect for one another that is unrivaled. They are just the sort of concoction that can innovate in a market short on it.
As they would tell it, over the course of the last 3 years as we dealt with the pandemic and then the after effects that it had on the labor force at large in the US, they had businesses (about which they were very bullish) experience struggles related to their ability to staff up in field service based roles to meet the potential roll up M&A opportunities that were inherent (and achievable) in the thesis. The macro market for talent was holding them back from executing on growth strategies that could really propel the platform. Should they have seen this coming? Were they wrong to make the same assumptions they’d always made relative to human capital and its availability?
Then the recognition of this condition started to create some optimism in them… What if we gave our portfolio companies some specialized insight related to the workforce? How would that advantage us in diligence and in crafting a value creation plan? We professionalize other functions in the portfolio companies like finance and operations; couldn’t we do the same for the workforce?
They were asking some cutting-edge questions that I hadn’t yet seen Private Equity fully embrace. It seemed that this competency existed somewhere at the intersection of strategy, data/analytics and talent. Together we conceived of a role that we called Head of People Analytics that will reside inside the GP on the Portfolio Ops team, and we’ve been off to the races!
Turns out there’s quite a developed competency running through parts of the public company landscape pertaining to strategic workforce management that we dove into. Many of the questions we had in mind were ones that needed to be addressed by companies who either operated in hyper competitive markets for talent and/or needed to develop some highly specialized sets of workforce skills in order to be successful. Some of these provided a roadmap that PE could follow where we could cherry pick the most transferable strategies that could impact our middle market portfolio companies (who deal with real world constraints around capital and access to people).
I’m excited to imagine an evolution where this competency becomes the next big thing in PE Portfolio Ops. I’ve found a deep vein of talented people who salivate over the idea of taking their knowledge base and applying it across a diverse set of companies… testing themselves, their training and their ability to influence in an environment that still isn’t sure how to implement it.
Like everything else in PE, all things related to this initiative will be ruthlessly measured and success will be defined by the value it can create and ultimately it’s impact on valuation, but I can’t think of a more potentially differentiated value driver to create alpha in the middle market. Unless A.I. can figure out how to replicate the customer experience that must occur in a business’ facilities, we’re still going to need a professional and contented workforce. As the former Notre Dame football coach, Bob Davie, once said “It’s not the X’s and O’s. It’s the Jimmy’s and the Joe’s.”
Look for a follow up to this blog post once we hit “paydirt” on this important new project. And feel free to reach out if you’d like some more granular context on what we’re learning about this exciting new branch of PE.