By: Carroll Leatherman
Sophisticated private equity sponsors are increasingly using performance advisors to support quick out of the gate value creation plans. Performance advisory coaching is a process that helps executives identify where strengths and weaknesses lie in business operations, so that executive leadership teams can quickly execute against a value creation plan that most effectively helps grow, scale, or turnaround a company in a set time horizon.
We have seen a thematic shift in the support executive leadership teams are provided from private equity and venture capital sponsors, with performance advisory coaching becoming part of value creation plans by financial sponsors at the initiation of an investment. This is a paradigm shift away from past practices, when financial sponsors used performance advisory to assist struggling executives or companies that were deemed turnaround situations after six months to a year of making the initial investment.
Critical areas of the value creation plan that are supported by performance coaching are:
- Productivity
- Organizational strength
- Quality/Customer service
- Bottom-line profitability
Decades ago, executive coaching was used as a performance improvement tool when an executive leadership team was deemed a low performer and needed help executing against plan. This was used after the financial sponsor had worked with the portfolio company for some time, and feared their investment in the company was not going to be a success. Performance advisors are now being used to strengthen leaders’ already strong skills and increase growth and profitability. This significant change can be attributed to the increasing upswell in capital allocated to control positions in private equity, and the shortening time horizons for success (“hold period”) — Low performers are no longer coached, they are moved aside, and the trend today is to provide executive leadership teams with coaching support as soon as possible relative to the commencement of the hold period.
Successful performance coaching can have a positive impact on a range of different ownership scenarios, from start-up venture -backed, to growth equity and more traditional private equity situations, as well as turnaround scenarios. Successful engagements can drive overall team performance and success by unifying the executive team’s alignment with the investment thesis of the financial sponsor and can correlate to quicker exits for the financial sponsor.
Increasingly, we see both VCs and mega firm sponsors offer performance advisors to almost every CEO of their portfolio companies, similar to offerings they provide related to technology, procurement, ESG, as part of the suite of systematic functional offering being driven by sophisticated talent management initiatives.