Something BluWave Founder and CEO Sean Mooney says private equity, as an industry, has had to embrace culture and the role of people in a business. That's in part because an increasingly competitive landscape has led to the prevailing strategy of transforming companies rather than optimizing them.
"And what they learned through the course of this: These aren't fast growing companies," Mooney said at the 2024 Nashville Smart Business Dealmakers Conference. "Typically, they're every day mom-and-pop businesses on Main Street, not Wall Street. In terms of most of the industry, they learned that if you're going to transform a company, people 100 percent matter."
Today, with hundreds of private equity firms and thousands of portfolio companies, human capital is the top trend in private equity.
"And we look back at our data in the first quarter of 2018, 18 percent of the projects they'd call us for in terms of equipping them with a resource was people," he says. "Last year it was 43 percent. And the biggest area that they're really adding to their playbook is really fundamentally assessing in due diligence before they even buy the company, who is the team that they have? How do they make them better? How do they add more people?"
He says what PE is doing now is reviewing their teams to determine who they have, if they're the right people, and whether they need more resources? It's essentially doing diligence on themselves not just to identify gaps and train up their team, but to strategically map what they find to their strategy.
"The biggest trend in private equity right now is called talent-to-value, where they're mapping and saying, 'Here's where we're going to get 80 percent of our growth here.' It used to be you'd put like as close to an A as you could in any one seat," he says. "We're going to put 80 percent of our chips on this one part of the business, and maybe do things differently. It's part of what the private equity playbook has evolved to."
While he says PE is seeing the value in building a strong culture, they're also data people, so they're looking at as many metrics as possible.
"There's this constant pursuit of getting the right people on the bus," Mooney says. "And I think, through a lot of the evolution of the industry, it was this idea that we're going to spend a lot of time just changing horses and jockeys throughout the journey through building a company. And one of the things that we're seeing come up right behind this, not just changing horses, but spending the time up front. They're bringing in consultants that help them think about how do you get the most out of your team? How do you hire the right people? How do you help teams work well together? There's all sorts of use cases within at least the private equity ecosystem where they're trying to build not only a person and not just think of the CEO, but how do we make the entire organization work effectively?"
To that end, he says private equity is very good at score carding, something he says comes out of the Lean Six Sigma mentality from Toyota production systems. PE now takes a lot of time to identify what they're looking for up front before buying a company because they can no longer switch midstream — he says there's no room in the returns for that. And to ensure they've got the right people, they do workplace tests, cognitive aptitude tests, personality assessments, and use tools like predictive index, or Hogan assessments, and talk to experts in their field.
He says the emphasis now is on inspiring people within an organization. And it's a key way to drive better results.
"The world is so competitive," Mooney says. "It's about transforming a company, not optimizing it anymore, because the world it just moves way too fast. And you're competing against not only your peers in the U.S., you're competing against your peers in the globe."
For those who are looking to bring capital into their business, he says they're going to look at things like the company's turnover, their diversity, how long people have been with the business. That's why sellers should self-diligence before going to market.
"Take the time to do diligence on yourself before you ever contemplate capital, and doing things about it," he says. "Because if you think about going to a capital provider, every element of risk that's unaddressed lowers your valuation. Every risk that's mitigated increases it. So take an honest look at yourself and say, What can we do to make ourselves a better company, particularly through the lens of human capital, which is not only important in venture capital, where I think it always has been, but also through private equity now."
He cautions that PE is going to be judging the CEO during the management meeting. And if that CEOs answering every question, no deferring to anyone else in their management team, PE is likely going to skip the dinner.
"If you're that person, you just lowered your valuation," Mooney says. "And so even through selfish altruism, you need to build your team, and you have to help them stand on their own. What you're going to also find out, which I found out as I became an operator, is life becomes a lot easier. There's a reason why the only hair I have left is gray. It's because it took too long to learn that. But those are the things that not only are good for your business, it's broccoli with cheese on it; it's also good for you, and it's good for your valuation. And so, if you know your metrics, you're building a team that stands on its own, and you're having people who can add value to it, it's not going to only be better for your valuation, but better for probably your personal sanity and health and wellness as well."
