Cash is Still King, But Speed is the New Queen – Accelerating Value Growth in 2024

In today’s rapidly evolving private equity landscape, the pressure on sponsors and management to accelerate post-acquisition change has never been greater. With rising asset prices and tightening economic conditions, the cost of delaying the execution of the Value Creation Plan (VCP) is significantly higher. While “cash is still king,” the need for speed has now taken the throne as “queen.”

Sponsors and investors increasingly recognize that the success of a VCP hinges on the competence of management and their ability to engage the broader organization in the change process. However, the skills that led a management team to a successful buyout are often insufficient to drive the next phase of value growth. In response, astute funds are becoming more proactive in assessing organizational capabilities and investing in leadership development from the outset.

The challenge for sponsors lies in influencing management practices and behaviors without overstepping boundaries that could undermine accountability. Managers often hold an asymmetric information advantage regarding day-to-day operations, making it difficult for sponsors to assess subtle behaviors and management processes. These factors, which are critical to outstanding leadership, can be easily spun in a favorable light, especially in interactions with the board. The key question remains: How can organizational development be accelerated at the board level without compromising management autonomy?

Aligned interests in end goals are a foundational strength of the private equity model, particularly with meaningful equity participation. However, alignment alone is not enough. The most effective way to drive and accelerate behavioral change, without jeopardizing management accountability, is through transparency. By establishing a fact-based view of behavioral and management gaps—one that both management and sponsors agree upon—a rational and constructive discussion on performance improvement can take place. When confronted with credible data, managers are more likely to make informed decisions, even in challenging areas such as their own behavior and the composition of their senior team.

Achieving a mutually agreed, objective view of leadership competence and behaviors is no easy task. Both management and sponsors are often too close to the situation, with vested interests that can cloud judgment. Some funds attempt to mitigate this by involving non-executive directors, but these individuals are often perceived as being too aligned with either the sponsor or the management to be truly impartial.

A more effective approach is to engage a neutral third party, such as Humatica, to provide an objective, data-driven assessment. By benchmarking the specific behaviors and management practices required for the next round of value growth, organizational gaps can be clearly identified and addressed. This not only facilitates faster and higher-quality decisions regarding the organizational setup but also fosters trust between stakeholders. With a shared understanding and a common set of facts, discussions about issues and solutions can proceed without lingering doubts about the intentions of other stakeholders or the quality of information provided. This approach lays the foundation for a productive and valuable business relationship that is crucial in the high-stakes environment of private equity.

As we enter the final quarter of 2024, balancing the imperative for speed with the need for transparency and trust remains crucial for driving sustainable value growth.