In our 2022 Market Insights Survey into the value creation process in the private equity (PE) sector, developed in collaboration with Coalition Greenwich, ‘People and Talent’ was cited as the second most popular lever of value creation. And – despite an increasing focus on tech investment and digital transformation – it is expected to remain so over the next three years at least.
This is a really encouraging finding. Getting the human side of deals right is vital to value creation. But this means going beyond the traditional approach – focusing on the management team – to preserve and create value across the organisation: 91 percent of our survey respondents say they have a revenue or a balanced revenue/cost focus to creating deal value, not simply a cost-cutting approach.
Companies today are complex and often have a considerable tech component. The PE market itself is very competitive, so as a PE investor, you may find yourself targeting assets in industries you’re less familiar with. Whether you’re buying tech, biopharma, healthcare – there are going to be groups of people who are critical to the value of that business. It is clearly in your interests to keep those people engaged and onboard.
It’s about using people and talent as a lever to create additional revenue or prevent value leakage. Corporates are increasingly prioritising this in their M&A transactions to ensure they get maximum value from the deal, particularly with valuations being so high. But it’s often seen as secondary by PE buyers, whose primary focus traditionally is on cutting costs to improve the bottom line.
Our 2022 Market Insights Survey says 47 percent of PE firms take a balanced approach to revenue and costs when developing their value creation plans. Cutting costs is the easy part. Getting people to collaborate and innovate to deliver revenue growth is more complex and requires a focus on engaging people.
Corporates tend to be better at this than PE firms. We recently worked with a global technology giant in Silicon Valley who bought a business for US$1 billion. By putting in place a value creation strategy that prioritised people and talent, we achieved a 99% take up rate of our integration engagement platform and half the usual rate of attrition in deals – a massive value driver when compared to their previous deal activity.
There’s a behavioural angle to people and talent, too. You can often find value by understanding how the behaviours of your people can influence revenues and thinking beyond the senior management team in terms of your incentive strategy.
For example, we worked with a large travel company that was pursuing a multi-channel strategy as part of its value creation plan. But it wasn’t working. When we looked into it, we found that people’s behaviours were working against value creation. Staff working in the high street branches did not enter email enquiries into the central system as they should, because if they did that, the transaction would be ‘stolen’ by the online channel and they would lose that customer. So, the actual incentive was to prevent the other channel from getting that customer, rather than supporting a seamless multi-channel process. Once you understand that, you can take steps to address it and drive the digital transformation strategy.
So how do you achieve high people engagement and lower attrition in deals? One of the tools we use is a digital engagement platform to engage, connect and motivate staff, so they actively want to stay with the business and help the new owners achieve their objectives. When we use ‘human-focused’ digital solutions like this, we see a measurable difference in terms of attrition.
The human side of ESG
The human angle cuts across most of the other main value creation levers as a tool for driving revenue growth by engaging and motivating the workforce. In a market, a society even, that is increasingly focused on ESG, you can’t afford to ignore the human side when you’re implementing a new value creation strategy.
This might include initiatives like running employability skills workshops for departing workers when you’re closing a factory, or funding additional training to help people find new jobs or explore new opportunities. These kinds of programmes help to minimise the adverse impact of cost efficiencies on the local community.
And they work. A few years ago, a global energy company took over a competitor in the industry. After the takeover, rather than simply laying hundreds of people off to drive synergies, the company initiated an individual development budget for every employee in the target to access skills and training opportunities with the looming closure of their headquarters. In that year, the target business had the best results ever. For the first time, people could see there was something in it for themselves, and that made a real difference.
This is the human side of value creation: achieving your revenue and cost efficiency targets in a way that helps to protect your reputation and reduces the negative effect on local communities or groups. To deliver on this, PE investors need to consider the human aspects of a deal and engage and motivate all employees to drive growth, foster innovation and create value.