Investor Cheat Sheet: Questions to Ask About the Human Capital Strategies of Your Portfolio Companies
The ability to critically assess and optimise the human capital strategies of portfolio companies is a crucial advantage for private equity firms. Gaining that advantage starts with asking the right questions.
This investor cheat sheet outlines a curated set of questions that investors can ask to quickly probe and evaluate the human capital strategies of their portfolio companies.
Without asking the right questions, it's impossible to understand how human capital performance is impacting the bottom line.
See below for the list of questions to ask the HR teams at your portfolio companies.
Questions on Talent Acquisition
Identifying and understanding the most effective methods for new talent acquisition is vital. The obvious question to ask is this: What strategies drive the most incremental benefit for new talent acquisition? This question is foundational, helping investors pinpoint where HR efforts are most effectively attracting top talent.
Just don't let that be the only question you ask. Follow-up questions should include:
What are the tactical priorities of these strategies for acquisition?
What input metrics (time-to-hire, cost-per-hire, quality of hire, etc.) impact these priorities?
Why do we think this impact is possible?
How confident are we in these tactics working? (And why?)
What tests can we conduct, or what data can we collect, to build confidence?
These questions can help private equity executives understand what HR tactics are deployed for talent acquisition, the rationale behind them, and their ultimate effectiveness. Ultimately, the answers to these questions can lead to the optimisation of human capital strategies so that they positively impact EBITDA and other business financials.
Questions on Retention
Retention of existing talent is a crucial aspect of any business model, especially in the context of portfolio companies in private equity. The first question to ask regarding retention will be similar to the first asked about acquisition: What strategies drive the most incremental benefit for employee retention?
This initial question aims to identify the employee interaction points that are most effective in retaining talent, a key aspect of sustainable growth and profitability. Follow-up questions should include:
What are the tactical priorities of these strategies for retention?
What input metrics (employee turnover rate, engagement scores, promotion rate, etc.) impact these priorities?
Why do we think this impact is possible?
How confident are we in these tactics working? (And why?)
What tests can we conduct, or what data can we collect, to build confidence?
By posing these questions, private equity investors can thoroughly evaluate the retention strategies of their portfolio companies. This allows for a better understanding of how these strategies are developed, their expected impact, and their actual effectiveness. With answers to these questions, private equity executives can make more informed investment decisions and provide better strategic guidance.
Questions on Compensation Strategy
If a portfolio company is adjusting its compensation strategy, the first question should be specific to that strategy. These follow-up questions can help you better understand how the compensation strategy may influence EBITDA:
How is the compensation strategy impacting acquisition and retention metrics?
To what extent has the effectiveness of the compensation strategy changed over time?
Do we envision changes in the compensation strategy over time?
How is the current compensation strategy affecting the team's ability to test alternative models?
That final question is particularly important. Many companies offer standard compensation packages. But in a rapidly changing talent market, the real question becomes: How can the team gain learnings outside of traditional compensation models?
Ask Questions That Empower Informed Decisions
The questions listed above give you a head start in connecting human capital performance to EBITDA. To take the next step, it's important to build a financial model that includes a tactical layer. With this layer in place, a single toggle at the tactical level flows directly to the enterprise value of a company.
If you have any questions, or if you need support with human capital strategies at your portfolio companies, the GIBUS Leadership team is always here to help. Contact us to schedule a brief consultation.
