New Research Reveals Disquieting Data On Private Equity Due Diligence
Signals Low PE IRRs and Long Holding Periods
New York, NY (July 12, 2016) –Epsen Fuller Group, a Top-20 executive search and leadership consulting firm, today announced the release of new research revealing the prevalence and impact of poor leadership due diligence. The research includes a detailed analysis of 323 current and recent investments 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. By studying the time between date of investment and key C-suite leadership changes, Epsen Fuller sought to discover if the absence of a rigorous human capital diligence and associated leadership assessment leads to costly leadership and management changes downstream from the date of investment. The study found that over two-thirds, or a full 69 percent, of all changes occurred between 6 and 48 months. Even more importantly, the average leadership change occurred a full 27 months after acquisition. These ‘late in the game’ leadership changes present a strong correlation between prolonged investment holding periods and suboptimal fund and deal IRRs.
The research has been published in a report entitled Leadership Due Diligence: The Elephant in the Private Equity Boardroom and authored by Thomas Fuller, CEO & Managing Partner of Epsen Fuller Group, NACD Board Governance Fellow and Board Director of NACD NJ, Tingley Rubber Corporation, and the AESC. The report speaks to the traditional ‘customary due diligence’ as a strictly ‘by the books’ process noting, “Financial experts compute the [human resource] costs such as payroll, benefits packages, severance packages, retention incentives and other expenses that may be generated once the deal takes place.” It continues, “Later in the process, a review of more intangible issues such as customer and vendor relationships, market potential, competitive landscape and brand strength may follow, but an in-depth leadership and talent assessment seems to fall by the wayside.”
Corroborated by McKinsey, EY, and Bain Capital
The findings in Leadership Due Diligence are corroborated by related research by McKinsey & Company, EY, and Bain Capital. “If you have to change the team midstream, it’s associated with demonstrably inferior outcomes in terms of longer hold periods and lower IRRs.” says Pete Witte, Global Private Equity Research Leader, EY.
David Harding and Ted Rouse of Bain Capital echo this conclusion in a study of 40 mergers and acquisition deals. They note “Too often dealmakers…gather reams of financial, commercial and operational data, but their attention to what we call human due diligence – understanding the culture of an organization and the roles, capabilities and attitudes of its people – is at best cursory and at worst nonexistent.”
Epsen Fuller’s report goes on to introduce the new concept of the Leadership Quotient℠ (or LQ℠), for a deeper understanding of the talent, leadership, culture and overall human capital assets of an organization, which goes far beyond the typical due diligence focus on people cost and headcount. According to Leadership Due Diligence, Epsen Fuller’s LQ℠ process provides a holistic assessment of the organization’s talent landscape, its leadership capabilities, its culture and workforce engagement, as well as the overall alignment of talent to the business. The LQ℠ approach promises to allow a PE firm to align the C-suite and key talent properly from the acquisition onset, short-circuiting the need for costly changes downstream in the investment timeline, thereby significantly improving the acquisition’s performance as well as overall fund performance.
PE firms that perform these types of leadership assessments are able to make leadership changes with agility and speed soon after the deal close. According to the Harding and Rouse research, 90 percent of successful deals had identified and targeted employees for retention within 30 days of acquisition, allowing them to make any necessary management changes early on.
Of the findings, Mr. Fuller notes, “The lack of true leadership due diligence is truly private equity’s metaphoric “elephant in the room”. While many PE firms often say they ‘bet on great management teams’, few actually perform the kind of holistic assessment of the leadership, cultural and overall talent alignment that delivers actionable intelligence of the human capital assets of their investments.” He continued, “We are thrilled to be releasing this report to help private equity gain insight into the LQ℠ of their future deals, and ultimately maximize the gains on their investments.”
Leadership Due Diligence: The Elephant in the Private Equity Boardroom is a free downloadable resource, available here.
For more information or to interview Thomas Fuller of Epsen Fuller Group, contact Calgary Branagan at firstname.lastname@example.org or 212.619.0089 ext. 321.
About Epsen Fuller Group
Epsen Fuller Group, epsenfuller.com, is a Top-20 executive search and leadership consulting firm headquartered in New York, and with offices in New Jersey and San Francisco as well as major markets and business centers throughout the world, providing instant access to a world-class executive talent pool driving the global economy. With an integrated suite of leadership solutions, Epsen Fuller Group delivers a dynamic experience, outstanding service, and exceptional value in Executive & Board Search as well as Leadership, Governance, and Private Equity Advisory services.
The firm specializes in three industry verticals – consumer & lifestyle, life sciences, and digital – placing top talent in blue-chip client organizations worldwide.