The most successful private equity exits are achieved by companies that make changes to their leadership teams during the investment cycle, according to a report by leading executive search firm Drax.
Making the changes earlier rather than later in the investment cycle is particularly likely to improve the level of success, the research found.
The Drax Leadership Insights Report 2018 reveals that 73 per cent of the private-equity backed companies achieving the best exits in the financial year 2017/18 changed their Chief Financial Officer at least once during the investment cycle.
It also found that the best performing companies made the change to their CFO considerably earlier than other companies, at 13 months into the investment cycle compared to 21 months for all companies achieving an exit.
The Drax report also found that 30 per cent of companies achieving the best exits changed their Chief Technology Officer during the investment cycle, underlining the ever increasing importance of a company’s digital strategy.
Drax conducted the research in order to develop an insight into the role that talent plays in value creation. It used its proprietary drxDATA platform to analyse the performance of the 318 private-equity backed firms with an equity cheque above GBP5 million which achieved a successful exit in the UK in the financial year 2017/18. The best performing exits were defined as those placed in the top 25 per cent of all exits by size of return on investment.
Graham Roadnight, Drax Managing Partner, says: “There is no magic pill to guarantee a successful private equity investment and exit cycle. However with money multiple buy-ins being what they are today it is important to understand what can drive value creation during the investment cycle.
“These findings indicate that talent is a central value creation strategy for private equity and that leadership should receive the same proportionate level of focus alongside the other strategic value creation propositions of internationalisation, acquisition and digitalisation.”
Samuel Robberts, Head of drxDATA, adds: “The Private Equity industry is facing an extraordinary challenge right now. Buy-in money multiples continue to increase and deal cycles are accelerating whilst often providing less access to management, yet investment cycles and expected returns remain largely the same. In this Private Equity cocktail, the focus on the value creation process is more critical than ever before.”
The Leadership Insights Report also found that there is a strong correlation between the previous private equity experience held by a management team and the quality of the exit they achieve, and that the companies achieving the best exits place more emphasis on hiring management talent with situation experience than with sector experience.
In addition, the companies that achieve the best exits tend to make fewer acquisitions during their investment cycle, but they buy more substantial companies and do so earlier in the cycle than other companies.
