Even in today’s strong public equities market, private equity remains a desirable asset class, relied on by institutional investors to generate alpha. However, with the proliferation of funds and the amount of capital to be deployed, generating outsized returns has become more challenging.
We have seen the industry shift focus from financial optimization to operational improvement, but with the latter already well-explored, where do we go from here? Firms that want to stand out must look to other areas of portco businesses to create value, and no aspect is riper for innovation than human capital.
Many inside and outside of PE pay lip service to this notion, but few treat it as the strategic value driver it is. Happy, engaged employees work harder, execute better ideas, and contribute to higher returns. However, a recent study found that 73 percent of all employees are “disengaged” from the company they work for. Could you imagine the impact on your firm, your portfolios, and, more broadly, the global economy, if even a fraction of those people were fully engaged?
Whether you call it engagement, satisfaction or happiness, we have seen first-hand the positive financial impact putting people first has.
It’s important to understand that driving employee engagement isn’t about yoga classes, company-paid lunches, or a casual dress code. While these perks can create short-term joy, they aren’t the type of benefits that propel employees to do their best. For this, you have to do three things: 1) connect with employees’ passion, 2) empower and support them, and 3) measure the impact.
Passion and purpose
Connecting work to an employee’s passion starts in the recruitment process. Instead of handing a candidate a balance sheet and asking where they would cut costs, start by asking what motivates the candidate both in and outside the office, what impact they hope to make, and what they view as meaningful work.
Within our office, we have every employee complete a 1-day workshop called Passion & Purpose that helps identify individuals’ passions. These are usually a mix of professional and personal goals and understanding how these can mesh is critical.
Once hired, retaining world class people is hard. By definition, this cohort has high standards and great ambitions. To keep them, we have to be very flexible around roles, constantly adjusting and re-defining responsibility in order to tap into the benefits from maintained focus, drive, and productivity. Although someone may take some time to ramp up to a new role, we find that in the long run, the drive that comes from putting an employee into a role they are passionate about allows them to contribute even further to the business. As a result of this flexibility, these employees tend to be loyal to and appreciative, which keeps turnover to a minimum.
Empowerment and support
If you believe that everyone from the firm’s upper management to the entry-level employees in your portfolio companies should play a role in value creation, you have to make the commensurate investment in them. This means the right combination of empowerment and support.
It’s not atypical for a PE firm analyst to simply play the role of being the fifth person on a five-person deal team where they spend two years formatting financial models and doing little else. This is a complete waste of resources, prioritizing a low-value function over the professional you supposedly believe will strengthen your team.
If you have confidence in your hire, practice extreme empowerment and give them ownership, autonomy and responsibility early on. Two key predictors of employee happiness are the amount of control they have in their job and the amount of opportunity for learning and growth. Provide these and they will step up to the challenge and deliver more value to your organization than you would have imagined.
Extreme empowerment can feel overwhelming without appropriate support. While most firms only offering professional coaching to executives or the C-suite, Alpine provides a 6-month coaching program to all levels. We find that as a result, people are constantly learning, growing and taking on more and more responsibility, which more than outweighs the cost of the coaching program.
Even though sentiment is emotional, it can and should be routinely measured. One way of marking progress in employee satisfaction is Employee Net Promoter Score (eNPS), which uses employee input to create a single number on a scale of -100 to +100. According to Comparably, a score above +22 is considered great – finance is, as expected, lower. As of January 2019, Alpine’s average eNPS across its entire portfolio was +33, and the eNPS at Alpine HQ was +76.
You can do this too. The assessment takes just a few minutes to complete and, if distributed regularly, allows employee sentiment to be measured and treated as a core KPI.
The ultimate proof is in the success of investment. We find that increased eNPS is often correlated with increased financial and operational performance. Call it people-driven operational improvement. Those who think putting people first is a secondary priority might be interested to learn that Alpine portfolio companies led by a PeopleFirst trained leader from our CEO in Residence program have generally outperformed our portfolio companies where an external CEO was recruited after close. If it were within a handful of companies, we could say this was a fluke, but decades into this test, we know this method is the future.
Private equity has the capacity to be a force of unparalleled change in business performance, and putting people first unlocks an powerful toolbox to do so. Focusing on employee satisfaction runs in tandem with returns, not in opposition to them. Firms who ignore this new frontier of value creation–for themselves and their portfolio — will be left behind.