Strategic HR: Critical for Value Creation in Private Equity

Private equity (PE) firms are renowned for their focus on maximizing value creation in portfolio companies. While financial restructuring, operational efficiency, and strategic realignment often dominate the agenda, the role of human resources (HR) strategy is increasingly recognized as a pivotal lever for driving sustainable growth. In a setting where the skills of workers and a company's performance are crucial for development, having an effective HR strategy isn't just important—it's essential.

The Human Capital Imperative 

People are at the core of every organization. In the private equity context, where companies often undergo transformative change, having the right people in the right roles can mean the difference between success and failure. A robust HR strategy ensures that: 

1. Talent Alignment with Strategic Goals: As PE firms drive operational changes, ensuring that leadership and teams are aligned with the new vision is critical. This involves identifying key talent gaps, restructuring roles, and recruiting leaders who can execute the transformation effectively. 
2. Culture as a Competitive Advantage: Mergers, acquisitions, or aggressive scaling can disrupt company culture. A strong HR strategy can help maintain or reshape culture to align with the firm’s strategic objectives, ensuring employee engagement and retention during periods of change. 
3. Performance Optimization: A data-driven approach to performance management, enabled by HR, helps ensure accountability and fosters a high-performance environment. Aligning incentives, such as equity participation for executives, with the firm’s value-creation goals further motivates teams. 

HR Strategy as a Value-Creation Tool 

Private equity investments are often time-sensitive, with exit strategies planned within a 3-7 year horizon. This timeline necessitates rapid yet sustainable improvements. An effective HR strategy plays a critical role in achieving this: 

1. Driving Organizational Agility: In the fast-paced world of private equity, portfolio companies must adapt quickly to market demands. A flexible HR strategy ensures organizations can scale or pivot efficiently, whether by building workforce capabilities or implementing new structures. 
2. Leadership Development and Succession Planning: Strong leadership is a cornerstone of successful portfolio companies. HR strategies that prioritize leadership assessment and development ensure that companies have a pipeline of capable leaders who can drive the business forward post-acquisition. 
3. Mitigating Risks During Transitions: High turnover, misaligned incentives, and poorly managed restructurings can derail value creation. A proactive HR approach minimizes these risks by fostering clear communication, managing transitions with empathy, and retaining critical talent. 

The Role of Private Equity Firms in Shaping HR Strategies 

PE firms themselves are becoming more involved in shaping HR strategies within portfolio companies. Many now employ operating partners or HR specialists who work closely with management teams to design and execute these strategies. Key focus areas include: 

• Talent Assessment During HR Due Diligence: Identifying strengths and weaknesses in the existing leadership team and workforce is a growing part of the PE due diligence process. This allows firms to plan for immediate post-acquisition needs. 
• Standardizing Best Practices: PE firms often apply lessons learned from other portfolio companies to create efficiencies. By sharing HR integration best practices, they enable portfolio companies to build stronger foundations. 
• Monitoring HR Metrics: Measuring employee satisfaction, turnover rates, and productivity helps track the effectiveness of HR strategies and their impact on value creation. 

Real Life Applications 

Recently, our team assisted a private equity group investing in the middle market with an emphasis in real estate. The client approached our team for due diligence services as well as insights on employee turnover. While the financial numbers were aligned, and the employee base seemed to be enjoying the company culture, the investors were puzzled by a steady stream of involuntary resignations.  After further turnover analysis, our team discovered that more seasoned employees and those over 40 years old were leaving in greater numbers than younger employees, but why?  We learned that a combination of pay rates, location commutes in a highly congested urban area and a very competitive talent market were all contributors.  With HR strategy and further analysis, this client was able to implement knowledge management strategies to ensure retention of key company and industry information, as well as take steps to cultivate an environment where longstanding and highly-skilled employees  feel empowered and appreciated. 

Why bother with HR Strategy?

For private equity firms, the importance of a well-defined HR strategy cannot be overstated. It serves as a critical enabler of organizational transformation, ensuring that the right talent, culture, and structures are in place to drive value creation. As PE firms continue to recognize the strategic importance of human capital, HR strategy will remain a key pillar in achieving superior returns and long-term growth for portfolio companies. By investing in people, private equity firms are investing in the future success of their investments. 

Why  29Bison?

Choosing the right partner for HR due diligence and integration is critical to the success of any transaction, and 29Bison offers unmatched expertise and support in navigating these complexities. With a people-first approach, we go beyond traditional due diligence to address not only workforce-related risks but also opportunities that drive long-term value creation. Our comprehensive HR due diligence services uncover hidden risks, optimize workforce strategies, and identify synergies that align with your strategic objectives. Post-transaction, we provide tailored HR integration solutions designed to foster a seamless transition, retain key talent, and build a cohesive organizational culture that supports sustainable growth.

At 29Bison, we’re more than human capital consultants—we’re partners invested in helping you achieve your vision by maximizing the potential of your most valuable asset: your people. Let us help you turn challenges into opportunities and create a solid foundation for success. Reach out today to learn how we can support your HR diligence and integration needs.