As the world of business battles with the Great Resignation, talent management has been cited as the most important operational lever for the second year in a row. Indeed, the importance of optimizing human capital has only increased as labor markets tighten, cited by 60 percent of respondents to our Private Funds Leaders Survey 2022, conducted in partnership with MUFG Investor Services, as opposed to 46 percent of respondents last year.

“We are experiencing an incredibly tight labor market here in the US, so the ability to attract new talent and retain existing talent will be crucial,” says Joshua Davis, founding partner at Stellus Capital Management.

“What you really need is the capability to find good people to manage your businesses and a sufficiently strong employee proposition in each portfolio company so that that you can attract and retain great talent,” says Shani Zindel, chief investment officer at Livingbridge.

“Then, of course, you have to ensure that you are aligned with that talent in order to deliver the best possible outcomes. Nothing has a bigger impact than talent management, in my opinion.”

And while salaries in many sectors are spiraling, wage inflation is not the only retention tool available. Employees are increasingly placing value on flexibility in a post-pandemic world. “Covid has been a cultural accelerator and businesses are coming to terms with that,” says Phoenix Equity Partners’ CFO Steve Darrington. “A huge percentage of the population won’t go back to work five days a week and if you demand that they do, they will go and work for someone else.”

Meanwhile, although the emphasis on people still dwarfs the use of tech integration as an operational lever – cited by 32 percent of respondents – it is clear that a digital lens is key.

“This really is the biggest area of change in the past five or so years. Pretty much every business in every sector has technology essential to its business model going forward – or a threat if not adopted,” says Gareth Whiley, managing partner at Silverfleet Capital. “Identifying what technology is important and how each business will use, or develop, available technology is often integral to the equity story.”

“Nothing has a bigger impact than talent management”

Shani Zindel, Livingbridge

Stephen Richmond, partner and CFO at Abris, for example, says his firm develops a digital roadmap for each of the mid-sized production and services businesses that it typically invests in to ensure they meet the expectations of international trade buyers at the point of exit. “We also employ an IT specialist within the value enhancement team to work with management at portfolio companies to implement these plans,” he says.

Christiian Marriott, partner at Equistone Partners Europe, meanwhile, points out that the pandemic has accelerated the shift towards digital-led business models and that private equity firms have stepped in to partner with small and mid-sized companies on reconfiguring and digitizing operations.

“The pure tech space in Europe is incredibly well established – just look at SaaS as an example,” he says. “But repositioning previously analogue portfolio companies as progressive tech-enabled businesses is now one of the strongest levers for value creation available to private equity, especially for those of us investing across a wide range of sectors.

The power of pricing

Against the backdrop of rocketing inflation, the critical nature of pricing strategies as an operational lever is also in the ascendency. “Having the skill to understand and manage your pricing power is going to be critical,” says Darrington. “If your pricing power is strong and you leverage data to identify breaking points, that will insulate you from inflationary costs to some extent. But if you are a price taker, your only solution will be to cut costs.”

“Personnel costs, supply logistics costs, energy and commodity prices are all rising dramatically and will need to be managed as much as possible,” adds Whiley. “Whether or not those prices can be passed on and how pricing strategies are set will be key to how profitable businesses remain in a period of rising inflation.”

“We are experiencing an incredibly tight labor market here in the US”

Joshua Davis, Stellus Capital Management

IK Partners CFO James Yates, meanwhile, points out that the situation is particularly acute for those companies impacted by conflict in the Ukraine, a country that provides several raw materials necessary to the food production industry, for example.

“Portfolio company management teams will need to be able to pass on the cost increase to their customers and this is not always 100 percent achievable for all companies and all customers in a timely manner,” he explains. “I will be taking a lot of care to ensure the impact is mitigated.”

“We have observed significant cost inflation in most businesses in recent months,” adds Richmond. “Cost management and bold pricing strategies are both increasingly important tools in mitigating the impact of inflation on margins and trading results at these companies.”