It is critical for private equity firms to approach talent management in a smart manner for the success of the companies they invest in. It is an obvious fact that when an investment is made, it becomes natural for a PE firm to wonder whether the senior management in their portfolio company is good enough to materialize expected results.
Having a wise understanding of professionals working in a portfolio company is of high priority to achieve appropriate results and regulate investment vision. That is the reason why private equity firms are often seen getting involved in the recruiting process of the portfolio companies for the sake of protecting their interests and escalate the chances of success for those companies.
In many ways, PE firms not only invest in companies but also in the people working for them. So, it has become very common for them to be assisting the portfolio companies in sourcing talent and forming appropriate compensation systems.
Kevin Hudson, the nation manager of Grant Thornton’s Private Equity industry team, once stated that in a survey of 217 middle-market portfolio companies carried out by them, it was found that approximately one in five of the companies reported that they were helped by their PE firm investors in sourcing professionals for important roles in the business. Furthermore, 88 % of the times their assistance turned out to be extremely useful for the portfolio companies.
Though executive search firm and online talent management systems play their part, various general partners believe in using their own experience, judgment and connections to find highly competent employees for their portfolio companies, who are not only persuasive enough but have also been a part of effective career programs.
According to Nick Veronis who is the co-founder and managing partner of iCapital Network, many private equity firms tend to exploit their networks to find capable candidates for key positions, especially at the C-Suite level.
Apart from sourcing talent for portfolio companies, a few private equity firms engage in constructing compensation and benefits solutions.
Bruce Benesh, partner-in-charge of Grant Thornton’s national Compensation and Benefits Consulting practice mentioned that in the same study they also found out that almost the same number of PE firms were involved in preparing compensation models and the portfolio companies that experienced those services felt overwhelmed with the results.
Verois also had some thoughts regarding compensation models. He believes that applying a well-devised management incentive program that can inspire the senior management and align their interests with the company should be a major aspect of a buyout model.
Relating to the compensation programs to motivate senior executives of the portfolio company, Banesh explained that there are many qualified and non-qualified plans that have to be examined, especially for the employees that hold comparatively little or absolutely no equity in the company. As it is essential to make sure that there is a proper alignment of interests among the leading executives and in case it is not possible to share more equity, then there should be other relevant incentives.
Nowadays, it has become incredibly fruitful for both private equity firms and their portfolio companies to be working together for sourcing the best talent with the assistance of an efficient talent management system, third-party experts and specialists.