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Improving human capital decision-making to maximise value creation in private equity

Higher multiples are requiring investors to work harder than ever before to derive value from their portfolio.

Recognising that the market isn’t going to take care of it as it might have done in the past, the PE industry has been embarking on a new frontier of value creation.

Human capital management is becoming an increasingly important element of value creation plans, and firms are seeking to understand what good looks like on the people side of the equation.

Kiddy has conducted in-depth research into the current reality of the human capital challenges facing the sector, involving 19 different Private Equity firms spanning both large and mid-cap funds, and interviews with Investment Directors, Operating Partners, and firm CEOs.

Our research identifies a range of issues which are preventing firms from maximising the human capital side of investments. These include factors that are impeding sharp decision-making around people and performance, fixed assumptions about leadership capability and the best routes to turning around performance, myths about CEO effectiveness, and lack of depth in understanding what good assessment and performance evaluation look like. When unpicked, there are a number of key contributing factors and risk points which can be identified. This paper focusses on the issue of ineffective decision-making, which was identified as a key reason why human capital can become a handbrake on value creation.

Specifically, this paper examines the key unconscious decision-making biases which influence human capital decision-making in Investment Committees, portfolio review meetings, and board meetings. Being literally and emotionally invested in portfolio management teams clouds objectivity; judgements are swayed by personal liking and optimism biases, focus shifts to recouping sunk costs, and attribution errors are made. For example, performance challenges are put down to the market when there’s a real leadership performance issue at play (and vice versa).

Our research identifies that these biases, plus a lack of sufficiently rigorous performance assessment and management processes, act as a significant handbrake on value creation from human capital, making it tough to make objective and timely calls on CEO and Management Team capability. But there are ways of improving
decision-making around people and performance, which will enable the early adopters to get ahead on the human capital side of value creation.

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