Adversity has proven to be a catalyst for innovation among private equity-backed businesses navigating the challenges of 2023/24, a new report has highlighted.
With economic uncertainty and market volatility, these private equity sector businesses have pushed leadership boundaries to maximise value creation, the LCap Group Leadership Capital Report 2024 found.
The sixth LCap Group Leadership Capital paper shines a spotlight on the correlation between optimised leadership and financial performance on exit and identified four emerging trends among the top performers: adapting leadership to market shifts, building high-performing teams, focusing on leadership behaviours and competencies and leveraging new leadership roles to drive change.
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Within these trends, ten key insights emerged as critical factors for driving leadership success now and into the future, the report showed.
'Yet again, we saw that the most successful businesses make more change, make change faster, and have larger, more balanced leadership teams,' Samuel Robberts, Chief Strategy Officer at The LCap Group
'Yet, we also saw important shifts, such as the role of domain expertise in helping businesses through uncertain times. New leadership roles have also emerged to bolster expertise, strategic oversight and execution in key areas, while core leadership roles have evolved and expanded, amplifying the impact they can have on business success,' he continued.
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The report examined 1424 private equity-backed companies that exited in the last year to assess how Leadership Capital correlates with success and can provide a roadmap for businesses and investors looking to optimise their leadership strategies for future success.
A challenging environment for investors
The current cohort of exiting businesses, and their investors, have navigated an exceptionally turbulent market landscape. Acquired at the tail end of the 2010s, these businesses were hit by a whirlwind of unprecedented events: the Covid-19 pandemic, the war in Ukraine and the post-pandemic inflation crisis, putting leadership teams and investors to the test.
Despite these difficulties, private equity has remained resilient, continuing to deliver strong growth even as other asset classes faltered. Leadership Capital emerged as a key differentiator for top-performing businesses, demonstrating its value as a strategic asset for navigating uncertain times.
Leadership innovation amid adversity
Adversity often fuels innovation, and the findings in this report underscored that - the best-performing companies have been those that prioritised building high-functioning leadership teams capable of evolving with the business.
A particular emphasis has been placed on founder-led businesses. Top performers in this category have built balanced leadership teams around their founders, ensuring succession plans are in place to maintain stability as the business scales. These teams have also focused on aligning leadership behaviors and competencies with market needs, particularly as domain expertise and customer-centric leadership have become vital in the post-pandemic era.
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Evolving leadership roles for the future
In today’s fast-changing business environment, traditional leadership structures are evolving to meet new demands. Emerging leadership roles, such as Chief Technology and Product Officers (CTPOs) and M&A Directors, have become integral to many top-performing businesses bringing fresh perspectives and specialised knowledge to the executive team.
The role of the chair has shifted from a purely governance position to one with greater strategic influence, particularly in times of market turbulence. The report found that top-quartile businesses were appointing chairs earlier in the investment cycle to maximise their impact. Similarly, interim leadership positions are increasingly used in turnaround scenarios, with third and fourth-quartile businesses relying more heavily on interim executives.
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Key trends and insights
Four key trends stand out among top-performing businesses in this report:
- Value creation and leadership demands shift: The levers for value creation have changed, with margin improvement becoming a key driver. Top performers made twice as many leadership changes as their peers, adapting to new market demands.
- Market and customer-focused leaders: Leadership teams with strong domain expertise and situational experience drove higher equity value at exit. Customer-centric leadership was particularly valuable in responding to rapid changes in market behavior.
- Proactive leadership strategy: Top-performing businesses were more strategic about leadership changes, often making significant hires in the first 18-24 months. These businesses also had larger and more specialized leadership teams.
- Emerging leadership roles: New roles, such as M&A Directors and Chief Technology Officers, have become critical in driving business growth and executing strategic objectives.
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The report also highlights several other trends, including the rising importance of Chief Human Resources Officers (CHROs) in boardrooms and the value of succession planning in founder-led businesses.
'Better performing businesses increasingly see the value of a CHRO to help build a focused, engaged and productive workforce, to deliver the change and growth required in a defined timescale,' the report stated.
