Investors are often the last to learn of important issues around personnel attitudes and dynamics at portfolio
companies. Financial data is a statement of past performance and lacks information on the ‘pulse’ of the
organisation, attitudes and the levels of tension or slack - invaluable for visibility on future performance.
This highlights the differences between leading and lagging indicators. Investors face the dilemma of how
to access leading indicators without interfering with the executive team and eroding trust. These issues
can be addressed by the investor collaboratively designing a protocol for gathering and assessing HR data
in a structured way (i.e. making just as clear what data won’t be collected as will be). A process that gives
investors a deeper level of partnership with the portfolio company on mutually beneficial terms.
Bain & Co. tracked nearly 2,000 private equity deals between 1994 and 2004 and saw how the majority of due
diligence was at the level of ‘validating’ financial data1. Many deals therefore have scope for investors to deepen their
analysis to include HR data, for performance enhancement post-deal.;
Private equity observers have seen a trend in 2008 of increasing CEO changes at portfolio companies by investors as
a reaction to the economic climate. However, investors risk making only superficial changes, without the visibility of
performance issues throughout the management hierarchy.
There are in addition cultural differences in how investors intervene with portfolio companies. Human-Equity’s 2008
survey showed that Scandinavian investors are half as likely to make management changes as their North American
counterparts. These variances point to the fact that there are many perspectives to portfolio monitoring and
interventions which merit investigation and understanding. Human-Equity’s structured HR analysis helps demystify
the psychology and ‘soft’ parameters around management, and clarifies cultural differences.
This article emphasises the opportunity for investors to keeping a closer ear to the HR performance and monitoring data
- without disempowering the executives of their operational responsibilities. This places the investor in a position to
proactively manage its partnership with the portfolio company, beyond typical interventions of rationalisations. With
a clear delineation of which HR parameters the investor will want to measure and how they are measured, previously
untapped intelligence can be harnessed, and a respectful partnership with portfolio companies developed.