Avoiding Misalignment and Maximizing ROI in Operator-Led Private Equity

by | Mar 10, 2021

Over 70% of private equity investors and their portfolio company (portco) executives agree that company culture is critical to the successful implementation of strategy, yet only 13% formally conduct an evaluation of their portco’s culture.*

What is culture and why does it matter?

Organizational culture — the assumptions, values, and behaviors underlying the statement “this is how we do things here” — influences employee engagement, strategy implementation, and operational efficiency. Leaders who understand their organization’s culture and how to intentionally align it with strategy can shape the culture to engage their employees and more quickly achieve strategic objectives.

Too often, leaders do not fully grasp or account for organizational culture when implementing a new strategy. This lack of understanding is particularly risky for Private Equity firms with an operator-led investment thesis. A mismatch between portco and the operator who will lead it can be a very expensive mistake. The success and strategy of a new leader can quickly be derailed if their leadership behaviors are misaligned or at odds with the existing portco culture.

The Operator / Leadership Misalignment

PE firms taking an operator-led investment approach, including Search Funds, often work with a roster of operators to identify a potential portco with significant opportunity for growth and where the existing ownership is seeking to exit. The firm will acquire the company and place an operator from their own team to lead the company.

The risk with this approach is that even an experienced operator with an excellent strategy may find it challenging to execute if their leadership behaviors are in conflict with the existing portco culture.

How well an operator’s character aligns with the culture of the company they join will largely determine if they gain the trust and followership of the employees. A leader without the trust and backing of their team will struggle to grow the company and execute on strategic priorities. Further, a misalignment between new leadership’s behaviors and the existing company culture can generate tensions between teams, greater leadership turnover, and operational inefficiencies. It can be difficult to grow a company when the leadership is fighting culture-related internal fires. 

A Simple Solution to Mitigate Risk

There is a simple way to mitigate this risk: assess and understand the leadership and culture dynamics at the outset of an investment. Performing a Leadership and Culture Assessment is the first step to understanding organization culture and the implications of that culture. Conscient Strategies’ PE-focused assessment measures the existing organizational culture and leadership dynamics across 10 key dimensions linked to the company’s specific strategic objectives.

This unique approach allows us to draw out and quantify where an organization falls on the spectrum of important values, such as:

  • Status-quo vs. innovation
  • Top-down vs. consensus decision making
  • Results vs. process-driven

As a result, we help investors, and their operators, identify the key leadership capabilities needed to implement changes and drive growth within the portco’s existing cultural context.

In some cases, we find that the existing portco culture does not serve the strategic objectives of the PE firm and operator. In that context, the culture assessment provides valuable insights into what is working and what should be changed to optimize ROI. Identifying the gaps between the existing and the ideal culture is key to mitigating risk and setting the portco up for growth from the outset. The PE firm, and their operator, can leverage that information to set a strategy that includes shifting the culture to better serve the strategic objectives.

Beyond just assessing the portco culture, to truly create alignment between operator and portco requires evaluating the leadership behaviors of the potential operator(s). Culture is shaped by leaders modeling behaviors and values. Leaders who understand the existing culture and recognize which behaviors will most influence growth can proactively shift the culture. Conscient Strategies’ assessments can quantify the operator’s strengths and skill gaps in terms of key leadership behaviors like:

  • Defining a vision
  • Communicating transparently
  • Building alignment
  • Acting decisively
  • Driving results

The PE firm can then ensure the operator has the leadership behaviors and skills necessary to drive forward the company and shift its culture. Culture and leadership are already recognized as key to successful PE investments and many firms are already assessing how a portco’s culture and specific leaders fit with its strategy. But, doing so in a more systematic and data-driven way will improve outcomes. Rather than relying on gut feelings, using a culture and leadership assessment at the outset of an investment enables the PE firm to more effectively align the operator and portco.

Learn more about Conscient Strategies’ Leadership & Culture Due Diligence »


* Source: https://www.alixpartners.com/media/14381/ap_annual_pe_leadership_survey_2020.pdf

Katherine Butler-Dines specializes in project management, strategy design, and business development. With a passion for helping companies grow efficiently and effectively, Katherine focuses on helping people and businesses put into place the structures and processes to not simply adapt to change, but embrace it. She has previously supported quantitative and qualitative research projects on entrepreneurship, particularly about women entrepreneurs, across 11 different geographies.

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