In organizational diligence for private equity-backed portfolio companies, one of the most nuanced challenges is deciding where to focus attention: on the “horse” – the organization itself – or the “rider” – the CEO and leadership team.
Evaluating both qualitative and quantitative data is critical to uncovering where the portco’s greatest opportunities and risks lie – and whether an investment and a team are ultimately going to be successful drivers of value creation.
Sometimes the company’s core capabilities and market positioning are strong, and what’s needed is a skilled leader to steer it forward. In these cases, diligence should emphasize leadership assessment — evaluating the CEO’s and team’s ability to execute the value creation plan.
Conversely, there are times when an exceptional leadership team is in place, but the organization’s foundational capabilities require transformation. In these cases, the focus should be prioritizing organizational diagnostics, functional alignment, and assessing operational readiness.
An integrated and flexible approach to diligence that is based on the specific priorities of the investment and leverages diverse data sets incorporates these key questions – which zone in on where rigor should be laser focused – on the horse, or on the rider:
1. Are the organization’s capabilities aligned with the value creation plan?
2. What are the critical gaps and risks that need mitigation?
3. Is the leadership team capable, aligned, and ready to execute?
4. How do qualitative insights from leadership interviews complement quantitative performance data?
This flexible and integrated process synthesizes functional diligence with human capital diligence to best inform an action plan – mitigating risks, reducing long term cost, and uncovering new avenues for value creation.