The Elephant in the PE Boardroom
“Delay is the deadliest form of denial.”
It turns out that these words, written by the British naval historian, C. Northcote Parkinson, who immortalized Parkinson’s Law, provide a sage caveat for the private equity industry. PE firms spend hundreds of thousands of dollars on outside counsel (legal, financial and strategy consultants) as part of their due diligence, but are missing information that is as critical, or even more critical, than anything customary due diligence processes uncover: an understanding of the leadership quotient of the organization. The absence of a rigorous human capital evaluation results in a prolonged investment holding period, suboptimal fund and deal IRRs (internal rate of return), and a lot of avoidable turmoil.
When private equity firms close a deal, they are betting their successful exit on outstanding leadership. Yet we have found many of those same PE firms making a decision some months or years later to switch out one or more members of the senior leadership team. Clearly, something wasn’t working according to plan.
As an advisor to PE firms, specifically in the area of leadership, talent and human capital due diligence, Epsen Fuller Group set out to discover if this type of “miss” on the leadership capacity of the teams in which they are investing is indeed a pervasive, and costly, trend. Epsen Fuller analyzed current and recent deals made by 27 private equity firms, representing a broad cross-section of various sized funds and industry specializations, from large to boutique and niche investors. Among these firms’ cumulative 323 portfolio companies, we found that the average deal resulted in two C-suite changes between the sixth and thirtieth month after deal closure. A full 69 percent of all the CEO and senior leadership changes occurred between six and 48 months post-acquisition.
Download the report to learn exactly why we’ve dubbed Leadership Due Diligence Private Equity’s metaphoric elephant in the PE Board Room.