Talent’s Role in Private Equity’s Playbook

Private equity (PE) firms and their portfolio companies (PortCos) face increasing pressure to drive growth, improve margins, and achieve business targets. Yet, even in the face of this pressure, many still underestimate the extent to which an increased focus on talent can drive value creation. But as capital remains expensive, holding periods extend, and competition for quality assets intensifies, talent is becoming a defining factor in performance and results.

Recent research suggests that PortCo leadership can impact financial outcomes by as much as15% and market valuation by 30%, underscoring the benefits of investing in human capital. In fact, top-performing companies invest 50% to 100% more in organizational initiatives, helping them to generate returns 3 to 4 times higher than their peers. On the other hand, when talent is not a priority, disengagement can result. The latest Gallup data shows that U.S. employee engagement dropped to its lowest level in a decade in 2024, with only 31% of employees engaged and 17% actively disengaged – meaning 1 in 6 employees opposes their employer’s goals. This disengagement erodes financial performance, leadership stability, and long-term value creation.

Linking Talent and Value Creation

Historically, PE firms paid little attention to human capital beyond replacing C-suite executives. While many PE leaders acknowledge that strong leadership is essential to sustained value creation, most still rely on traditional, transactional workforce management rather than investing in long-term development. Yet investing in talent can deliver measurable financial returns. The following emerging trends are making the financial case clearer than ever:

• Higher employee engagement drives profitability. Organizations in the top quartile for engagement achieve 18% higher productivity and 23% greater profitability.
• Longer hold periods demand structured leadership succession. As PortCos stay under ownership for extended timelines, the risk of leadership gaps grows significantly. Despite this, 55% of PortCos and 54% of PE sponsors admit they have no formal succession plan.
• Workforce disengagement weakens execution. High turnover at both the executive and workforce levels undermines PortCo performance.

Competing for Top Talent

The competition for top talent is associated with several key challenges, including:

• The lack of a leadership pipeline. A weak pipeline signals future instability.
• High executive turnover. Without clear succession planning, retention strategies, or aligned incentives, PortCos struggle to retain top talent – leading to extended holding periods and loss of institutional knowledge.
• Limited operational expertise. 31% of PortCo executives say sponsors lack the industry knowledge needed to guide leadership effectively.
• Disconnect between investors and operators. Conflicting priorities between PortCo CEOs and PE sponsors can lead to execution delays, friction, and weaker value creation plans.
• Failure to act quickly on workforce issues. Many PE firms acknowledge that waiting too long to address leadership gaps results in underperformance.
• Cultural misalignment in mergers. Post-merger integration challenges, including unifying leadership and maintaining employee engagement, can derail value creation.

However, top talent isn’t the only thing PE firms are vying for – they also face increased competition for investments, the challenges associated with a dwindling workforce, and the complexities of integrating corporate cultures during acquisitions. These challenges are only compounded by economic forces like margin compression, inflation, high interest rates, and investors’ expectations for faster returns.

Building Talent Infrastructure for Growth

PE firms that prioritize talent as a value driver consistently achieve stronger PortCo performance. Key initiatives for success include:

• Defining clear expectations for leadership roles and succession plans.
• Aligning strategy, compensation, and performance metrics to motivate management.
• Investing in leadership development to build a strong pipeline of future leaders.
• Tracking leadership effectiveness through retention, engagement, and profitability.
• Providing continuous training to sustain long-term growth.

We Can Help

At Elliott Davis, we specialize in optimizing organizational and talent strategies to drive value creation for PE firms and their portfolio companies. Our expertise helps to align leaders and teams, develop high-performing managers, and create structured workforce strategies that reduce turnover, improve execution, and accelerate value creation.

Contact us today to learn how we can help you build and execute your talent playbook.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.