How leadership teams that develop people turn strategy into predictable growth, and predictable growth into greater valuations.
This is the first part of a three-part series that focuses on the confluence of several things I love: Helping people and companies see and achieve great things; understanding how industries shift over time; and exploring the dynamic around value creation and value distribution. If you don’t know me “yet”, that combination might seem a bit eclectic. If you know me, it makes perfect sense.
Private equity has gone through several evolutionary stages over the last few decades. The first stage started with financial engineering: Buying well, using leverage, improving margins, and paying down debt to generate returns. Then it moved toward scale and multiple expansion. More recently, investment firms have leaned into operational improvement: Systems, discipline, and execution. Each phase built on the last in order to stay ahead of investment return compression. And like every industry, the easy sources of value creation eventually become commoditized, disruption occurs and a new competitive landscape is created.
That’s where we are now. Investor returns are getting harder to generate using the traditional playbook, and firms are being pushed to develop new sources of value creation. Studies from McKinsey and others have reported that as much as 30% of a company’s valuation historically is based on the CEO and leadership team. That worked then, but the emerging direction of value creation is becoming increasingly clear: The next frontier isn’t financial capital, strategy or headliner leaders, it’s the people systems and how human capital development in companies drives provable value by building organizational capability, capacity and scalability. Specifically, the ability of those CEO’s and leadership teams to develop people and build organizations that scale. Simply put: Amazing things happen at the intersection of scalable systems and People on a mission.
In the next post, I’ll break down what the research says about this shift, why more and more investors are starting to move toward human capital development as a primary driver of returns, and what that means for mid-market, growth-stage companies and their founders.