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April 2019

Linking talent to value in Private Equity

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Executive summary

Talent drives returns

But historically, we’ve brought less data

and rigor to talent than to everything else

We can now more clearly link talent and value, through a

combination of analytical tools and strategic rigor

2McKinsey & Company

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“It’s not what you buy, it’s what you build”

SOURCE: McKinsey OrgSolutions

Firms need to

demonstrate

sustainability

of investment

portfolios

Average holding

period for portfolio

companies has

increased, but operating

groups are resource-

and time-challenged

Capability-building is

therefore a top priority

The new priority

for success is

differentiated

capabilities

Current challenges in Private Equity

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To drive sustainable performance, the best companies must manage talent as well as they manage

money

1.0

2.0

63%

Slow Dynamic

29%

Relative TRS by degree of capital reallocation, Proportion

Probability of TRS higher than competitors, Percent

Human

capital

Mean correlation between

how capital resources are

distributed from year to year

in businesses is 0.92

On average, only 30% of

the most critical roles are

filled with top talent

Financial

capital

Rewards to bold, fast reallocation are high…

…but many companies fall

short

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In PE especially, investing with a clear focus on talent pays off

Success rate

of CEO from

start to finish

Average number

of years to

replace CEO

Cost of failure

results in 10–15x

annual CEO

compensation

44%

2.2 15x

2.5xReturn from 80% of

investments that hit

first year targets

After looking at

180 investments, a

PE fund

determined that

those that were

most successful

strategically linked

talent to value

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However, as we have heard from PE Firms directly, this is harder than meets the eye

“Investment teams

do not systematically

think about these

topics in a structured

way – leading to

blind spots post the

diligence process”

“Often we’re not

taking a data driven

approach to these

topics, with

assessments based

on meeting the

management team

rather than more

robust measures”

“We spend a lot of

time strategizing but

not enough time

thinking through the

operational

execution and what it

would take to

execute”

“This needs to be

led by the CEO, and

needs to have

management buy-in

to truly succeed”

“HR function is not

as developed as it

should be in terms of

strategically

addressing

challenges and risks

from a people

standpoint”

“People is the

number one

success factor for

us – both for the

portfolio and

ourselves”

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Linking talent to value provides a new lens on investing in and managing talent for value,

before and after the deal

Ongoing management

Manage talent for

value: Ensure portfolio

companies can sustain

talent management

After the deal

Link talent to value:

Get the right talent in

the most critical roles

Before the deal

Outside-in talent

diligence: Identify

talent synergies or

challenges

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Before the deal, publicly available data enables us to

incorporate human assets into due diligence as never before

Detailed current & historical talent data

Career

history

Aggregate across 50+ sources

400M+consolidated

profiles

Role

descriptions

Skills AwardsPublicationsCertificationsSchools/

degrees

We can now leverage a vast universe of public data – 400M professional profiles from 50+ sources

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This data can be mined to generate valuable insights on growth, talent synergies, and

organizational health

How did current and prior employees rate overall employee

experience, both relative to acquirer and to peer group?

What is the breakdown of employees in each job family

relative to peers, and how has this changed over time?

How are jobs and skills distributed geographically?

What is the company headcount relative to peers?

How has the headcount changed recently relative to peers?

Growth

Brand

Talent

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The CXO Baseball Card leverages public data to assess leadership teams before deal closure 1.0 5.0In comparison to peer organizations

ILLUSTRATIVE

3.7

3.0

3.6

4.4

Transform the biz

Stabilize sales

Boost engagement

Right-size the org

1.0

1.0

2.0

5.0

4.5

4.0

2.8

1.0

3.5

5.0

5.0

3.4

3.7

1.9

Reenergize the brand

Expand sales team

3.2

1.8

1.0

1.0

5.0

5.0

3.3

5.0

Build the digital brain

Optimize logistics

1.2

3.5

3.7

1.0

1.7

3.0

1.4

2.8Explore multi-channels

Grow the business 1.0

2.8

2.9

5.0

3.0

1.0

1. Re-structure

business

2. Scale

marketing

3. Digitize org

4. Drive

growth

CEO CFO COO CXO

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After the deal, start by determining the highest priority value drivers and size them accordingly

Incremental annual operating income by 2024Value driver

~$200M4 M&A

>$500M5 Risk management

~$500M1 Organic growth

~$200M3 Cost efficiencies

~$200M 2Technology, automation,

and analytics

Illustration with sample data

Inorganic

growth

Value

protection

Core

operating

value

A

B

C

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Rapid deployment of the best talent into the highest-value roles de-risks value capture

SOURCES: McKinsey Quarterly Winning with Talent Survey, n = 628 respondents, McKinsey client research, n = 19; PE case study

Critical roles New roles

Traditional approach to critical roles

Talent to value approach to critical roles

Key insight: Value driving and enabling roles can be found across the organization

90% of critical

talent is missed

when organizations

only focus on the

very top of the

organization

“Talent to Value” is

the disciplined

approach of focusing

your talent strategy

on the

disproportionate

value creators

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Linking talent to value provides leverage by tying business value to the most critical roles and actively

managing these roles capture value

Identify most

important roles2Get the right

talent in roles3Understand the

Value agenda 1

Create a list of 25-50

critical roles with

disproportionate

impact on value

Assess fit and match

talent based on role

requirements

Understand what will

drive value across

BUs and Functions

Prioritize development

and rigorous

performance

management of talent

in critical roles

Operationalize

and mobilize4

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Create a list of 25-50 roles with the highest allocated valueEXEMPLARY WITH SAMPLE DATA

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For each role, define role requirements and assess incumbents and successors SAMPLE OUTPUT

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Use technology to ground talent decisions in data, remove bias, and transform the conversation

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On an ongoing basis, build business accountability and HR capability to link talent to value

Make it the

CEO’s business

to link talent to

value

Coach talent to

drive value

Give HR the tools

to succeed

Build a

foundation of

people data to

drive decisions

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Do the CEOs of your portfolio companies know their most critical roles and what it will take

for them to be successful? Do you?

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Thank you