As investors become more aware of how talent drives value at a company, they are looking for ways to measure that impact and demanding more information about talent issues from the companies in which they invest. But investors won’t always wait for companies to crack the code connecting talent to performance; some are going ahead with this themselves.
Take private equity firms for example.
If asked who the biggest private sector employers are in America today, many would think of companies such as Walmart, Amazon, or General Electric. Not according to Michael Milken, chairman of the Milken Institute. In a speech he delivered recently at the annual conference that bears his name, the Financial Times’ Gillian Tett reported, Milken produced a list of America’s top 10 private sector employers, as calculated by the institute. Walmart indeed tops this list, but the next eight largest employers, according to Milken’s data, are private equity (PE) firms. And while Milken refrained from identifying these entities, it is not hard to guess who they might be, as Tett explains:
Carlyle and KKR, for example, are each estimated to employ about 700,000 people through their portfolio companies, which probably ranks them just below Walmart. Blackstone has “around 600,000” employees, as Steve Schwarzman, its founder, told the Milken event. Apollo, another private equity group, has 300,000 workers in its portfolio companies, while Warburg Pincus, General Atlantic, and TPG are only slightly smaller. Lobbying groups estimate that private equity firms now employ 11 million people throughout the US (the data are not very transparent).
Over the past decade or so, PE firms have become more like conglomerates. In the traditional model, private equity makes money by boosting the value of portfolio companies, then selling them at a much higher price, but according to research by the RBL Group, many PE firms are increasingly pursuing a “buy and transform” model. In this model, RBL’s Dave Ulrich and Justin Allen explain at the Harvard Business Review, PE funds must behave more like employers and pay more attention to talent and leadership. This has led to the emergence of leadership capital partners (LCPs), who are responsible for ensuring that both the firm itself and its myriad of portfolio companies have the right talent, culture, and leadership. According to RBL, over half of PE firms now have an executive with the responsibilities of an LCP:
Across the portfolio of companies, the LCP sets the tone and builds a common culture and is often responsible for hiring the HR leaders in them. LCPs bring firm-wide insights to activities like vetting or hiring CHROs within portfolio companies, encouraging leadership and organizational innovation in portfolio companies, and sharing best practices and learnings across portfolio companies. One way they do this is through knowledge-sharing councils among Chief HR Officers; these councils often meet 1-3 times per year and exchange ideas, tools, and experiences. The LCP is the curator of this group and may even specify which tools and systems portfolio companies should use.
LCPs also participate in divestiture negotiations. As PEs move to sell off firms in their portfolios, establishing the values of “intangibles” like leadership and culture has become essential for securing favorable divestiture pricing. LCPs can use the results of their annual leadership and culture audits to demonstrate continual improvement in the portfolio company’s talent, capability, and leadership, and instill increased confidence with buyers that past positive financial results are will continue sustainably in the future.
This is perhaps the closest situation in which investors have a comprehensive understanding of how talent is affecting the value of a business they are investing in. Of course, heads of HR rarely, if ever, come face to face to talk about the value of talent with their organization’s investment analyst community. That is precisely why heads of HR will need to help their CEOs and executive leadership team understand the value of talent, and communicate that value to investors.