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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.

 

 

Decision Level Scope and Control Timespan of Discretion Principle Question Primary Indicators
Management Operational (Process, Methods) Daily to 3 months The What Production
Executives Strategic (Direction, Risk) 3 months to 3 years The How Financial
Board Governance (Policies, Responsibilities) 1 year - lifecycle The Why Measures against Policies
Investors Fitness for Purpose Lifecycle Which Company Forecasts / Analysts
Table: Progressive Importance of Leading Indicators With Timespan of Discretion
Conclusions of the Article
For sample reports of leading indicators, contact performance@human-equity.com or call +44 207 193 9958

Pre-Deal Human-Equity accelerates and broadens investors’ investment filtering process,.
and post-deal enhances investors’ value-add to portfolio companies’ performance.

.... Based On ....
Integrated HR psychology and HR performance metrics