How to Balance Returns and Responsibility in Private Equity

There is growing scrutiny around how private equity (PE) firms conduct operational practices. Particularly in industries like healthcare, investigations highlight instances where PE ownership has resulted in reduced staff, drug shortages, and a decline in patient care – sparking debates on the ethical implications of such investments.

This is often associated with the traditional private equity approach, which tends to emphasize short-term gains, and has led to concerns about job cuts and hollowing out companies. Likewise, leveraged buyouts (LBOs), a hallmark PE strategy, can saddle acquired companies with significant debt, potentially limiting investment in innovation and workforce development. Such strategies have come under fire for their impact on the wider industry.

At the same time, there is increased focus on ethical leadership and moral conduct within business more broadly, making this is a growing priority for PE firms. Below, we look at some of the strategies PE leaders use to ensure they approach pre and post deal acquisition with ethical considerations in mind. 

Realign for Operational Excellence

PE leaders should shift the focus from pure cost-cutting to operational efficiency, allowing for long-term profitability without sacrificing jobs. 

These initiatives not only contribute to the long-term success of the company but also help preserve jobs and foster a positive workplace culture. The latter drives employee satisfaction, leading to higher retention rates and lower recruitment costs.

Pay Well and Plan Talent Needs

Attracting and retaining top talent is crucial for long-term financial sustainability. PE leaders should introduce competitive compensation packages, detailed training and development programs, and promote a supportive work environment through inclusive practices and values-based commitments. 

Furthermore, by introducing a robust succession plan across the portfolio, PE firms can mitigate the workforce disruption that often results from unplanned departures, before and after deals. 

Actively Manage the Portfolio

PE leaders should work closely with portfolio companies to develop growth strategies that create new jobs. They can leverage their industry expertise and networks to unlock new markets or product lines, leading to organic job creation.

Active portfolio management includes regular performance reviews and setting measurable objectives. This ensures portfolio companies are on track to meet their growth targets and helps identify potential people issues early on.

Focus on Reskilling and Upskilling

The digital transformation sweeping across industries – particularly AI and data analytics – demands a more adaptable workforce.

In particular, focusing on leadership development can help ensure PE firms possess the necessary leadership skills to help their portfolio businesses thrive in a changing and disruptive landscape. 

Engage Employees Through Ownership

Giving employees a stake in the company's success aligns their interests with the PE firm’s objectives. This creates a sense of ownership and accountability, and can lead to improved performance and reduced turnover.

Moreover, these programs can be a powerful tool for attracting and retaining top talent. In competitive job markets, offering a stake in the company's success can differentiate a firm from its competitors.

Future Financial Gains Through People-Centricity

As scrutiny on PE practices grow, we expect more demand for leaders with proven experience of balancing financial returns and responsibility.

Similarly, those who can create cultures that encourage experimentation, adaption to failure, and continuously seeking improvement, will be in demand. Regulation is only likely to increase across the PE industry, and future leaders will need the legislative acumen to navigate a stricter environment.

Our executive search and leadership advisory can guide PE firms in identifying and recruiting executives who not only have the necessary experience and skills but also align with the evolving demands of responsibility and regulatory compliance. Our deep understanding of market and legislative trends ensures we can advise on leadership strategies that create a resilient and adaptable leadership team who prioritize sustainable and ethical growth.

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