The survey was administered online from October through December 2019. Respondents consisted of 56 managing directors, operating partners, or founders from PE firms and 52 senior executives—primarily CEOs and CFOs—from portfolio companies. Sixty-eight percent of the respondents hailed from companies based in North America, with much of the remaining ones from locations in Europe. The largest share of portco respondents worked with companies registering annual revenues of $100 million to $500 million, whereas the majority of our PE firm respondents reported assets under management of less than $5 billion.
An ubertheme clearly emerged in last year’s findings: Smart management of human capital is vital for generating top-decile internal rates of return (IRRs).
Tracking any trend over the course of five years generates valuable insights. Developments in private equity (PE) leadership are no exception. With that in mind, we at Vardis are delighted to share findings from our fifth survey of leaders of PE firms and portfolio companies (portcos), conducted jointly with AlixPartners.This year we’ve built on that theme, asking participating investors and operators for their thoughts about the role of organizationalculture in portco performance. After all, culture is all about human capital—in other words, leadership and talent.
MUCH TALK ABOUT CULTURE—BUT LITTLE ACTION
This year’s survey results revealed a misalignment between respondents’ stated beliefs about culture and their actions. In answer to the question, When building a company strategy, how critical is it to consider organizational culture in its capacity to support the strategy? About 88% of PE leaders and 87% of portco executives said it’s critical to align the culture with the strategy to generate strong results.
Similarly, 71% of PE respondents and 81% of portco participants said successful execution of strategy hinges on having a culture that enables and encourages people to help implement the strategy. Indeed, the PE leaders strongly endorsed assessment of portco culture as part of the due diligence process.
But despite their belief in the importance of culture assessment, only a minority of our study respondents said they take a formal approach to the evaluation of a portco’s culture. We see that as risky because relying on informal culture evaluations can lead to subjective assessments that bear little resemblance to reality.
Result? Leaders gain few insights into whether a portco’s culture needs to change—and if so, how.
But perhaps both cohorts are more aware of the need to improve their culture-evaluation abilities.
In this year’s survey, more PE leaders were rated average or below average on culture assessment—by themselves and by portco executives—than in last year's survey.