Considering a Move to Private Equity

Working with Private Equity firms to elevate HR in their portfolio companies is an important and significant part of our work here at ChapmanCG.

Making that move from the structure of the public company corporate world to Private Equity is a big decision and is not always the right move, so we like to invest time with CHROs who are thinking about taking this step to help them understand the pros and cons. For a CHRO, this brings both opportunity and risk. The opportunity is significant; greater access, faster decision-making, less bureaucracy, and a direct opportunity to influence value creation. The risk is HR can become an execution function brought in after the important decisions have already been made. So, what should a CHRO look for when considering making the move?

What Does This Investor Believe HR is For?

This goes beyond the obvious “Is this PE firm good?” to understand how the investor and CEO see HR. Is it a functional necessity responsible for:

• Payroll
• Employee relations
• Recruitment
• Compliance
• Keeping the company out of trouble

Or a value-creation lever that will directly impact:

• Leadership and succession
• Workforce strategy and organizational capability
• Productivity
• Culture
• Talent
• Transformation
• M&A integration

There is a big difference between the two and the answer will significantly impact the ability of the CHRO to make an impact. Questions to consider when understanding the situation include:

• Why are you hiring a CHRO now and what problems are you looking for this person to solve?
• Was HR involved in the investment thesis and what people decisions underpin this?
• What would success look like in 12, 24, and 36 months?

Answers should make it clear that the purpose of this role is weighted to making the HR function more professional, and it should be obvious there is a clear connection to HR having an impact on business strategy.

Where Does HR Sit in the Organization?

• The obvious: who does the role report to?
• Will the CHRO participate in the full board?
• How frequently does the CHRO interact with the PE sponsor?
• Who owns the people agenda?
• Is the CHRO expected to challenge the CEO?

The purpose of this questioning is to understand what level of influence the CHRO is expected to have. In our conversations with CHROs, some have observed that while they have access to the board, that does not automatically bring influence over the decisions being made—that is achieved through building relationships and credibility.

Understand The Investment Thesis as Early as Possible

As a business leader, the CHRO needs to understand how the company is expected to create value. It may be cost reduction, organic growth, or M&A/roll-up. The role of the CHRO will be different in each of these scenarios. For example:

Cost Reduction: The CHRO may lead an organization redesign to improve productivity and upgrade leadership.

M&A/Roll Up: Due diligence, integration, culture building and scalable infrastructure will be key themes.

Growth: The CHRO will likely focus on talent acquisition, leadership capability, succession, and organizational scalability.

The answer to this question is critical, and in our conversations with CHROs it is clear that some have observed a fundamental paradox: PE demands value creation while sometimes restricting the very people investment required to create it.

To develop an understanding of the strategy and potential people impact rather than focus on understanding the proposed HR Strategy strive to get a clear view of three or four things that have to be achieved for the investment thesis to work and, with that, the role the CEO/PE investors expect people and organization play in making that happen.

How Realistic is the Exit Strategy?

This is an important question not only from a personal perspective, but also in understanding the potential impact on leadership and retention. It is widely accepted that one of the attractions of PE is the upside potential, but with that also comes risk, so it is important to understand that risk. A compensation plan may look good on paper, but it can potentially be less attractive if the outcome is uncertain or several more years away than expected. Things to understand include:

• What is the anticipated holding period and is the timing of the exit realistic
• How does the executive incentive plan work?
• What happens if the investment thesis changes?
• How have previous management teams in other portfolio companies been treated when delays happen?

What is the CEO Really Like?

CHROs have consistently expressed views that the CEO is probably the most important variable in determining whether the CHRO can succeed or not. A CHRO may have open access to the Board and PE investors but if the CEO does not want a strategic CHRO, the role will be heavily constrained. It is therefore important to understand:

• Does the CEO genuinely value HR and include the CHRO in business decisions
• Will they allow the CHRO to challenge them?
• Have they worked with strong HR leaders before?
• How do they behave when HR advice impacts/conflicts with a financial decision or pressures?

Access to the PE Sponsor

It is widely accepted that not all PE firms are the same. Some are considered heavy-governance while others are more empowered. As a CHRO, it is important to understand whether you prefer freedom with accountability or a more structured operating environment. Neither is inherently better—it is all about fit. It is important to understand the level of governance and how the PE firm intervenes when they choose to do so. Also, how much time does it take for the leadership team to prepare for board meetings.

Is PE Right for Me?

After taking the time to fully understand how the investors and CEO operate, as well as understanding how HR is perceived and the ability to make an impact, it is time to self-reflect to think about whether this is an environment where you can thrive. From our experience working with PE and CHROs the personal attributes that work for PE include:

• Highly self-sufficient and hands-on.
• Analytical and commercially minded.
• Comfortable with ambiguity.
• Low ego and not status driven.
• Decisive and adaptable.
• Comfortable with intense accountability.

As with every role a CHRO takes on it is rarely about competency—again, it is all about fit. For CHROs considering this move they need to be comfortable that there is alignment with the CEO and PE sponsor on what HR is there to achieve. If a candidate has been used to working in a highly sophisticated corporate environment, they need to make sure they believe that they can create results without an extensive machinery around them.

A final consideration is the fact that there is typically shorter tenure in the C-Suite within PE. This is generally not a reflection on poor performance—it usually means that they have achieved exactly what they were hired to do. Organizations evolve, and with that comes the need for a different type of leadership. It is important to recognize and be comfortable with that fact.