Boardroom Edge: How PE Firms Are Shaping Their Boards for Success
In the intensely competitive and high-stakes environment that is Private Equity (PE), firms are increasingly recognizing the invaluable role that strategic board appointments play in enhancing company value and accelerating growth. By assembling well-rounded, high-performing boards, PE firms can enhance portfolio value, guide companies through complex challenges, and set them on a faster trajectory to growth.
This shift in focus comes at a crucial time, as private equity firms are holding companies for longer periods due to decreased valuations. According to a recent study by Bain & Company, the average holding period for private equity investments has increased from 4.1 years in 2008 to 5.4 years in 2020.
The Role of Board Strategy in Driving Long-Term Value
Board expertise at the intersection of PE strategy and C-suite leadership is increasingly recognized as key to enhancing performance. The right board, featuring a mix of industry experience, operational knowledge, and innovative perspectives, can provide guidance, connections, and strategic insights, all of which contribute to faster growth and higher returns.
Data supports this trend: McKinsey & Company has found that top-quartile boards can increase a company's return on invested capital by up to 5%. Similarly, EY reports that 82% of private equity firms now see board composition as a top priority in their investment decisions. And for good reason—companies with diverse and experienced boards are much more likely to achieve above-average profitability.
Three Keys to Assembling Your Boards
Firms that recognize and harness the hidden value of strategic board memberships will be better positioned to maximize growth and returns. To achieve this, PE firms should focus on three key strategies when assembling boards for their portfolio companies:
1. Develop a Comprehensive Skills Matrix
Create a map of the skills, experiences, and expertise needed to achieve the company's strategic objectives. This matrix should align with the investment thesis and identify any gaps in board composition. By analyzing these needs, PE firms can construct a board suited to the unique challenges and opportunities of each portfolio company.
To optimize this process, many forward-thinking firms seek external expertise. Engaging experienced human capital professionals can provide valuable insights into emerging skills, industry nuances, and innovative board structures, enhancing the effectiveness and readiness of the skills framework.
2. Look Beyond Traditional Profiles
While industry veterans are valuable, consider candidates with non-traditional backgrounds who can bring fresh perspectives and innovative thinking. This might include digital transformation experts, sustainability leaders, or professionals from adjacent industries. These diverse viewpoints can be crucial in identifying new growth opportunities and navigating disruptive market changes.
3. Prioritize Cultural Fit
Ensure potential board members align not only with the company's culture but also with the PE firm's investment thesis and working style. A board that meshes well culturally can work more efficiently and effectively, leading to faster decision-making and smoother implementation of strategic initiatives.
The Competitive Advantage of Strategic Board Composition
As PE firms face prolonged holding periods and intensifying competition, assembling high-impact boards will increasingly set apart those who succeed. The ability to shape a board that not only enhances a company's performance but also aligns with PE's broader strategic goals is quickly becoming a key differentiator. With the right board members in place, PE firms can accelerate growth, shorten the hold period, and create enduring value.
