97% of private equity investors confirm that personnel issues are a key reason for not achieving targeted IRR. Clearly, sponsors need more transparency in this area to avoid overpaying in today’s heated deal markets. However, a recent Humatica study confirmed that less than 30% of funds utilise a structured approach to assess organisational issues pre-deal. According to Reine Wasner, Humatica’s Nordic Managing Partner, “There is still a big asymmetric information gap around organisational performance and leadership practices”. The lack of access to management and employees pre-deal was universally recognised as an obstacle, especially with competitive auctions. However, this needn’t be so any longer.
Working closely with industry practitioners and building on over 12 years of experience in assessing portfolio company organisations, Humatica developed a pragmatic approach to circumvent seemingly insurmountable access hurdles and deliver deep insights on organisational performance before signing. It’s done by leveraging cumulative experience and extensive behavioural data to anticipate typical organisational issues deep in the organisation, below the senior management.
Having benchmarked organisational performance for hundreds of portfolio companies over the years, Humatica’s databases contain millions of data points that are used to define what good and bad performance looks like. Specific organisational problems and hypotheses on post-deal performance issues are identified by selecting appropriate benchmarks from similar companies and deal situations. This can even be done based on just the IM and without direct contact with the portfolio company management in the extreme case.
Orchestrating organisational due diligence to consolidate and structure information from due diligence sources and touch-points, combined with the deal team’s experience, enables rigorous fact-based testing of hypotheses. Well-structured data collection from points of contact, such as management presentations and expert sessions, yields a rich load of information on how decision-making and implementation processes really work in the target company. According to Wasner, “The approach is non-obtrusive. It extracts critical information on leadership and organisational performance, but without alarming management or jeopardising deal success.”
With the right structure and process, Humatica’s accelerate due diligence service quietly unlocks a window on the critical leadership processes driving value creation. Red flags and key enablers are identified, that can be either acted on immediately or tagged for more in-depth assessment in subsequent due diligence phases or even post-deal.
Investors can no longer tolerate waiting months, if not years, to close the asymmetric information gap around organisational performance. Early, fact-based transparency is needed to accelerate 100-day plans and convert “potential” to “value” with a respectable IRR. New portfolio company leaders also welcome an objective view on the organisation as the deal is a one-time opportunity to realign management for the next round of value growth. In this regard, Wasner adds, “As a bi-product, transparency on the soft factors delivers a foundation for trust and collaboration between sponsors and management teams. It gets the whole relationship off on a good footing from the beginning”.
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