Chief performance officers can be a secret ingredient for private equity success. Here’s why

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Most leaders, and by extension, most companies, talk about people being their greatest asset. In the fast-moving world of private investments, executive talent is even more crucial. Due diligence decisions in private equity (PE) can often hinge on talent issues. Growth equity, likewise, is grounded in questions of human capital, as investors work to turn good companies into great companies. The success of venture capital investments can be even more reliant on the quality of the existing leadership team. Across the sector, private investment firms conduct ongoing audits of top executives’ performance and may take swift action when it falters, consistent with their fiduciary obligation to their investors.

“You won’t be successful unless you have the right people, the right dynamics, and the right culture,” advised one PE firm partner who focuses on early- and growth-stage companies. Said another PE leader: “It is almost certain that the executive leadership team that took the company from zero to $50 million is not the same team to scale to $300 million or $500 million.”

For all of PE’s preoccupation with talent, it’s still somewhat unusual for firms to have a chief performance officer (CPO), who is sometimes called the “human capital operating partner” or “portfolio talent lead.”1 In our latest survey of PE operating groups, half of firms with more than $2 billion in assets under management (AUM) had at least one talent specialist—either mid- or senior-level. These experts are rare in firms with less than $2 billion in AUM: only two out of 13 firms surveyed reported having such an executive. Talent-oriented partners often focus on working their contact lists and relationships with search firms to identify and place talent in jobs. However, some components of the talent picture may still be missing: even talent-focused operating partners may lack the specific skills to support portfolio companies through acquisitions and integrations. Senior executives may incorrectly use hierarchy, relationships, or intuition to determine how talent affects value creation.

The relative lack of CPOs may represent a lost opportunity for PE. A great CPO contributes to diligence and the creation of an investment thesis in critical ways. They assess whether C-suite leaders have the capabilities to deliver on the deal thesis, as well as whether the workforce has the scale or depth of skill required. They identify cultural issues that could provoke problems, such as a talent exodus or work slowdown, and flag inefficiencies throughout the organizational structure. CPOs are experts in organizational change, deploying people analytics that make understanding talent as data-driven as any other business metric, and creating collaborative networks of chief human resources officers (CHROs) across a firm’s portfolio companies.

CPOs are also instrumental in expanding diverse talent within portfolio companies (see sidebar, “Another role to consider: The chief diversity, equity, and inclusion officer”).

For firms that don’t have a CPO on board, there are three main aspects to consider:

  • the value CPOs bring to each phase of a PE deal cycle
  • the skills the CPO role requires
  • how to hire a CPO

Creating and filling a CPO role isn’t easy, for reasons captured in one CPO’s observation: “Being a good CPO requires you make the CEO happy, keep the deal partner informed, and be an expert, all while engaging your sense of diplomacy rather than offering critiques.” But the reward—gaining a talent edge in an industry where human capital makes a crucial difference—makes adding a CPO to the operating group a goal worth pursuing.

The value CPOs bring to each phase of a PE deal cycle

Arguably, a CPO’s most crucial contributions can be made immediately post-announcement, when they work on an integrated value creation agenda for the new portfolio company. From then on, they will be judged by how they leverage their expertise, build an ecosystem, craft incentives and compensation plans that reward attractive returns, and overcome organizational inertia. The job essentially consists of five distinct roles, each with its own demands.

The CPO as due diligence adviser

Before acquisition, the CPO functions primarily as a due diligence adviser who analyzes a target company through the lens of its existing talent and organizational health (exhibit). For some CPOs, most of their work in this phase is to ensure a strong management team is in place before their firm invests.

CPOs can provide organizational health assessments that inform investment decisions, synergies, and improvements (illustrative).

“It’s hard for my partners to want to make an investment if there isn’t a strong management team in the beginning,” said a partner and chief talent officer of a PE firm that makes investments through leveraged buyouts and as growth capital investments. “If I have to [completely change] a management team, then that means I didn’t do my work during due diligence.”

From day one of deal selection, the CPO is the go-to person for answers to talent questions that relate to what it will take to execute against the value creation plan. After a deal closes, CPOs often work with deal teams and senior management to create an organizational strategy as part of an integrated value creation agenda for the new portfolio company to ensure delivery of the investment thesis.

The CPO as the post-close CEO whisperer

CPOs work with portfolio management teams to execute organization effectiveness initiatives from day one and then to monitor progress against plans. This requires that they immediately develop strong partnerships with CEOs and senior leadership teams within portfolio companies. It can also mean coaching and counseling leaders (especially newly minted private equity portfolio CEOs) and other senior executives on organizational matters or convening them at roundtables so they can learn from one another.

The CPO as a talent shaper

Early in the deal cycle, the CPO becomes a talent shaper who develops scorecards for how well senior leaders deliver on goals. These can be used for performance evaluation, hiring, or off-boarding decisions at the portfolio companies.

CPOs often play a role in placing leadership talent, which is one of the reasons why they are sometimes sourced from executive search firms. They cultivate and manage executive talent pipelines for typical roles across the portfolio, including CEO, COO, CFO—and chief product officer and revenue officer for software companies—in partnership with other operating leaders in these functional areas.

The CPO as transformation architect

CPOs must provide sound strategic guidance based on the right data and incentives and by leveraging analytics while pushing forward performance improvement and change initiatives. They can transform companies by increasing organizational alignment and health while bolstering not just the caliber of the portfolio companies’ boards and management teams but all the roles that support value creation.

A CPO explained, “We look at whether the portfolio company has demonstrated evidence of doing change well. Then we look ahead at the three-to-five-year time frame, at what organizational capabilities the company is competitively capable of winning in a compressed time frame. Have they done it, can they do it, and what will be required?” Whether it’s to steer organizational and operational initiatives for margin expansion or growth, CPOs must show that they have the courage to lead change management efforts if necessary.

A leader for portfolio companies’ CHROs

A CPO can add value by serving as a leader for and conduit between a PE firm’s various portfolio company CHROs. The importance of this coordination became apparent to PE firms at the outset of the COVID-19 pandemic, when they quickly established health and safety protocols and remote work across their portfolios. As those needs have receded, firms have maintained networks of portfolio CHROs to address current issues including developing talent, creating flexible work systems, and building company culture.

CPOs can lead these networks. They might oversee roundtables, access to external experts, collation and distribution of relevant reports, articles, and materials, and other ways for CHROs to share and learn. This comradery is especially valuable because of the solitary nature of the CHRO role, which can leave some executives feeling isolated.

“Having a trusted thought partner to bounce ideas off, to get another perspective, and ensure you are headed in the right direction can be very valuable,” said a CHRO about having a CPO mentor.

CPOs also can leverage purchasing power for their portfolio companies, negotiating the best deals with providers of technology and other programs at reasonable prices. Smaller companies can enjoy the purchasing power of a larger enterprise by virtue of this collaboration.

The skills the CPO role requires

When asked to explain his job, a CPO made it sound simple: “My role is getting the right leader into the right role and then getting the team behind that leader.” Drilling down into that description, however, reveals a bedrock of expertise. Knowing who is the right leader, what is the right role, and how to get a team in place that will provide optimal support requires a unique package of mindset, experience, and ability.

The investor mindset

First and perhaps foremost, the commercial nature of the role means a CPO must possess an investor mindset. They should operate as unsentimental owners focused on business performance and investor returns across multiple portfolio companies. They should have a “nose for value”—that is, a strong sense of how a portfolio company can both grow and marshal resources. To be effective in her role, a CPO said she has to ask herself, “Would you put your own money in this company and back this?”

Diplomatic prowess

Because they need to act as pragmatic advisers to both deal teams and senior portfolio management teams, CPOs must engage in a web of complicated relationships. They have to be able to serve as strategic advisers, leadership coaches, key business-decision influencers, thought partners, and cooperative skeptics for multiple CEOs, management teams, and the investment team.

A metabolic rate geared to PE

CPOs must deal effectively with the high stakes and urgency required by working with a PE portfolio company. They must be able to roll up their sleeves, think and act quickly, prioritize, and be decisive. Operating successfully requires a hands-on consultative approach with a bias toward coaching and action.

Describing the pace of her job, one CPO said, “Everything we do at our firm in the talent and organization space is about speed to impact. It’s about fast insight, disciplined process, and data gathering.” Any initiative the CPO takes has to prioritize the business and its goals rather than a rigid set of standard practices. CPOs need to possess a real talent for creative, flexible thinking, so that they can contribute without adding burdensome layers to processes and systems.

Exceptional interpersonal skills

CPOs need to act as confidantes, which often involves managing many leaders’ private communication responsibly. Therefore, they must be highly strategic leaders themselves, who build credibility by modeling gravitas. They should be prepared to take unpopular stands while demonstrating low ego, strong communication skills, and flexibility. Most of all, they should always offer solutions. This is especially important for identifying and recommending performance improvements to critical strategic, operational, and organizational areas. It takes an enterprise mindset to determine the right resources, processes, and data to gather and communicate.

High emotional intelligence

To advise competently, CPOs must be able to read complex human and organizational dynamics. This can be tricky in high stakes situations in which pressure and complexities compound. CPOs need to know when to raise red flags and when to deliver tough messages—such as saying what the investor or portfolio CEO needs to hear, rather than what they might want to hear.

How to hire a CPO

It can be a tall order to find some someone with a track record of driving transformation who also has the business acumen to advise C-suite leaders and investment professionals across a multisectoral portfolio.

PE firms often find CPOs from three types of backgrounds or combinations thereof: qualified candidates tend to be organizational psychologists who do assessment and coaching work; former HR or executive search professionals; or people with relevant experience in private companies, including in other roles in PE firms.

Whatever the CPO’s original background, it’s important to remember that the role changes based on the phase of the deal cycle and that the candidates must be able to perform in all phases. Every CPO will need to be armed with intelligent digital systems to help identify the critical improvements needed for at-risk roles and the organization’s health. Lastly, a potential CPO should have firsthand, practical experience in propelling change—academic or theoretical knowledge isn’t enough.

CPOs with backgrounds in organizational psychology

These candidates often possess deep knowledge of organizational design and effectiveness, including the use of assessments to understand the health of an organization. This background can be helpful when CPOs must look at an underperforming business through the lens of organizational drivers. These candidates are particularly suited to understanding the culture and capabilities that are lacking, analyzing C-suite dynamics, and aligning the company’s organizational health to the investment thesis and value creation plan.

CPOs coming from HR or executive search

A CPO with a strong executive search background and digital rolodex of high-caliber talent can be a huge value-add. Similarly, someone who has been a talent leader and operator inside a company can bring a broad perspective regarding pitfalls to avoid and ways to deliver results.

CPOs with relevant private industry experience

Some candidates come from management consulting or PE firms that have truly invested in this capability. People with these backgrounds can offer a track record of working with CEOs to improve organizational performance, an analytical “investor mindset,” emotional intelligence, exceptional interpersonal and communication skills, and the ability to operate fast.

Historically, investment teams haven’t systematically thought about talent and organization in a structured way, leading to blind spots—especially after diligence. PE firms and their limited partners can no longer assume intangible assets such as human capital and culture—which have been estimated to comprise an average of 52 percent of a company’s market value2—will take care of themselves. Bringing in a top-tier CPO gives investment firms and their portfolio companies an edge over firms whose portfolio optimization groups haven’t yet evolved to include such a role.

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