May 18, 2022 – A constant in private equity is that the landscape is constantly changing. For some, these changes can lead to obsolescence; but for those with a vision, change is an opportunity to unlock new opportunities for alpha returns, according to a new report from Upwork. “A relatively slow change? The levers of differentiation a private equity firm can leverage as part of its value creation strategy,” said report author Tim Sanders, vice president of client insights at Upwork. “It’s taken decades of evolution, but we’ve come to the doorstep of an emerging new driver of PE value creation: talent transformation.”
During the 1980s, Mr. Sanders said, private equity firms were masters of leverage, backed by reasonable redemption prices and ample credit. “Over the years, financial engineering to improve arbitrage has gained a greater share of value creation,” he said. “But at some point in the ’90s, competition for takeovers increased their multiples and made it more difficult to generate alpha in a sustainable way.” According to a Boston Consulting Group study, operational improvements have gradually become the primary driver of a private equity firm’s value creation success. Today, “buy and improve” is the key element of most value creation plans (VCPs), appearing in 84% of those surveyed by Harvard Business School. So, what is the next big lever for value creation?
According to Sanders, about a decade ago, independent marketplaces rose to prominence, mostly embraced by small businesses and start-ups to expand their punching power in competitive markets. “They were able to recruit specialist talent without taking on the risk of a traditional job,” he said.
“As these marketplaces developed more robust digital and financial accounting capabilities, medium and large enterprises began to leverage this ecosystem as part of their digital transformation initiatives. During my work, I interviewed executives from companies in the PE portfolio, who revealed how they had integrated on-demand talent “part of their water supply” and how it had helped them to execute the actions VCP at a fast rate. Unlike conventional methods of implementing high-return, breakthrough growth, this approach has been adopted across all of these companies, boosting employee morale and retention, he noted.
Mr. Sanders also said the risk can be mitigated through compliance offerings, which compensate portfolio companies against misclassifications. A talent services layer provides a fleet of virtual recruiters to save managers time while keeping them in control. The talent pool is made up of skilled freelance professionals who work on a full-time freelance basis, compared to the recruitment firms’ army of temp and middlemen who are accustomed to on-site work and pose a risk of flight s are offered a full-time job. mid-project job opportunity. Mr. Sanders suggests three transformations that on-demand talent platforms can bring about:
1. Transformation of the “work”
At portfolio company PE Flexera, HR has shifted its mindset from talent acquisition to talent access. “A few years ago, on the recommendation of one of the operating partners, the company embarked on a rush to learn on-demand talent platforms, rethink the growth model of hiring on time full and break down projects and programs into tasks that can be delivered by on-demand talent,” Sanders said. “They offered the managers a budget for this as well as direct access to the platform (with guardrails, of course).” As they grew in confidence and mastery of this model, he noted, officials first saw cost savings as well as speed-to-hire measures that led to a even wider enterprise-wide adoption. One of the key operational improvements they have seen is an increase in the speed of work results, which results in faster project execution and accelerated speed to market.
2. Transformation of costs
“Distinct from cost reduction measures, this type of transformation changes the underlying structure of talent burden and builds flexibility and resilience into the operating model,” Sanders said. “It is important to note that for most portfolio companies, payroll represents 40-60% of their fixed costs. In a world where technology and facilities are becoming on demand, traditional talent models are the glue of the budget. Since in-demand talent can be scaled up or down, it serves to add variability to a holding company’s cost structure. Given the endless uncertainties in the current landscape, this should be a priority for any private equity firm as it protects its losses. In his book Post Corona: From Crisis to Opportunity, Professor Scott Galloway put it succinctly, if not humorously: “Cash is great for survival, but the real gangster trick is having a structure of varying costs”.
3. Digital transformation
Digital transformation – whether it’s data-driven decision support, e-commerce or process automation – is not something you buy off the shelf like computers, buildings or vehicles, according to Mr. Sanders. “It’s the result of the successful execution of dozens, if not hundreds of projects across the company, most of them done by human beings. If you can’t handle the work smoothly, your digital efforts will progress slowly, impacting your sales volume and exposing you to competitive risks. »
It’s no news that private equity firms need to optimize the talents of their portfolio companies to drive value creation, Sanders said. The questions are, at what level and at what point in the transaction cycle? “For decades, C-suite engineering was seen as the primary role of the private equity firm when it came to improving talent,” he said. “That’s why so many PE leaders come from executive search. But to drive sustainable value creation, what we need is talent innovation that permeates the entire operating model – and does not depend on management oversight beyond sponsoring its adoption and its scale.