PE can measure returns to the decimal point but capability is still a blind spot.
Ask a private equity firm how a portfolio company is performing and you’ll get an answer to the decimal point. Revenue. Margin. Leverage. Cash conversion.
Ask whether the company has the capability to execute for future growth expectations and the answer gets vaguer.
Private equity already recognises that talent drives returns. But it has invested far more in assessing individual leaders than in understanding the capabilities its portfolio companies need to deliver their plans.
PE firms do not ignore talent. They have built ways to assess individual leaders, but not necessarily a comparable view of the capabilities their portfolios depend on.
PE knows how to assess its leaders. What about everyone else?
In a McKinsey survey of general partners, 94% said portfolio company leaders contribute to investment returns. Their average estimate of that contribution was 53%. That is sentiment, rather than a measured causal effect. It is still a striking thing for investors to believe.
EY found that more than 80% of PE firms rank hiring and onboarding talent among their top three value creation priorities. And 43% of investors have increased due diligence scrutiny of portfolio talent management programs.
PE firms have also built dedicated talent functions. Spencer Stuart reviewed 50 PE firms and found that 58% had a portfolio talent lead. The largest have Talent Operations teams.
These leaders work on the firm’s investments, not the firm’s own staff. They run executive search and may choose the search firms to fill key roles. They may also assess and coach portfolio executives. They place interim leaders. Increasingly they work on top team assessments before deal closures. Spencer Stuart’s interviewees spent 10 to 40 percent of their time on pre-deal human capital work. One, a decade into the role, called 30 percent of his work “talent underwriting”: judging a target’s human capital for risk before the price is set.
Russell Reynolds found that 39% of PE talent partners were hired from executive search firms. Spencer Stuart found that more than 80% of talent leads building teams are hiring from search or assessment backgrounds.
That is a sensible profile for the job as it is currently defined. But it also reveals a gap: the function is built to see leaders, not necessarily the workforce as a whole.
Funds are missing risks that cut across their portfolios.
A 2023 report from Entromy, TalentScape and BluWave found that fewer than half of talent partners say their firms collect and analyse HR data across the portfolio to assess and predict risk.
Part of the reason is plumbing. Deloitte’s interviews with PE firms found that uneven HR systems across portfolio companies make consistent data hard to collect.
That leaves funds unable to answer some basic portfolio-wide questions:
Does the same critical skills gap recur across several portfolio companies, suggesting a common risk?
Which company has the internal succession depth to support its next stage of growth, and which depends on one key individual?
Where is a capability gap likely to constrain a value-creation plan?
These are portfolio questions. No single management team can answer them, because no single management team sees the other companies in the fund.
Why tracking capability could matter to returns
At the moment the financial benefit is argues, not measured. Research that quantifies the portfolio-level financial return or risk mitigation from capability tracking is lacking. The available sources suggest three ways that better visibility might help.
Earlier warning. One talent partner describes leading human capital indicators across the portfolio as a way to spot performance problems and act before they affect returns. The proposition is that a fund can see warning signs before they appear in lagging financial results.
Better-informed risk assessment. Talent underwriting already exists at the leadership level. Mercer reports that more than half of PE funds still do not routinely conduct human capital due diligence, and expects analytics to make it more standard and quantifiable. Portfolio-wide capability information could add a workforce-level view, complementing rather than replacing the assessment of senior leaders.
Stronger evidence at exit. Deloitte describes top performers using structured assessment, cultural diagnostics and talent data to strengthen the exit narrative. As EY found, investors are scrutinising talent programs more closely. Evidence about capability is easier to defend than assertion alone.
The proposition is not that measuring capability creates value by itself. It is that better visibility may help a fund identify material risks earlier, direct attention to the right problems and test whether the capabilities required by its investment thesis are actually present.
Give the fund visibility, not control.
There is a good reason to leave workforce data with each portfolio company. Funds influence through board seats and capital; they do not run HR. Management teams may see extra visibility as a sign of distrust. And a logistics business and a wealth manager will not define capability in exactly the same way.
That holds for individuals. It holds less well for patterns. A fund does not need to know what any one employee can do. It needs the shape of capability: where it is thin, where it is concentrated, where it is moving.
Aggregate by default. Individual data stays with the asset.
A shared language for capability does not mean every business needs the same capabilities or should be judged against identical operational priorities. It lets the fund compare relevant patterns without erasing the differences between assets.
The test for a solution
Any approach to capability tracking should meet three conditions.
It should work across assets that run different HR systems, the practical obstacle identified in Deloitte’s interviews.
It should describe capability in a shared language, so a gap in one company can be compared with a gap in another.
And it should report portfolio-level patterns while individual data stays with the asset.
Skills frameworks such as SFIA can provide a common vocabulary. But vocabulary alone will not solve the harder problems of collecting, comparing and using the data.
Platforms differ in how well they meet these conditions. TalentJam is designed around them, but a fund should ask any provider to demonstrate that its approach meets the requirements in practice.
Where this leaves things
Private equity has built sophisticated ways to assess the people who lead its portfolio companies. The next question is whether it can develop an equally useful view of the capabilities those businesses depend on.
Not to centralise workforce decisions or make every asset the same. But to see risks and gaps that no individual company can see alone.
If a firm builds a team to watch the top of its portfolio, who is watching the rest?
About TalentJam
TalentJam (www.talentjam.io) connects capability intelligence, performance management, and demand forecasting in one continuously updated system. Available as a platform, a managed service, or both, built for mid-market and public sector organisations that need more than a dashboard.
Sources
Entromy, TalentScape and BluWave: 2023 Human Capital Report (Business Wire).
Deloitte: Beyond the term sheet, the human levers that drive returns.
Mercer: The role of talent in private equity.
Spencer Stuart: What to Consider When Building Your PE Portfolio Talent Function.
Russell Reynolds: Increased focus on strategic talent management for value creation.
JM Search: PE Insights, the role of the talent partner.
Umbrex: Private equity operating partners.