Leadership: The Challenge for Investors

Investors are facing unprecedented challenges. However, with increased focus on leadership in their portfolio companies, risk could be reduced and returns increased.

The Challenges

Private Equity

The Private Equity sector is undergoing changes. Both deal activity and exits have slowed down.

The average holding period for PE investments has increased. Globally, the median holding period for PE-backed portfolio companies rose to 5.7 years in 2024—the highest since measurements began.

This means investors and management must deliver increased value through operating excellence over a sustained period. The days of “slash and burn”, i.e., rapid cost cutting and on selling, are over. In turn, this puts added emphasis on the leadership capabilities on the management and boards of investors' portfolio companies.

Venture Capital

For Venture Capital, the situation is similar.

• Venture Capital funds have reportedly experienced negative returns in recent periods.
• VC funds, on a global average, returned –3% through September 2024, following seven consecutive quarters of negative average financial returns.
• In the U.S., VC holding times have increased to an average of 5.4 years, a marked increase since 2021.

Human Capital and Leadership

Human capital and leadership issues contribute to poorer returns and longer holding periods.

• Only about 54% of private equity firms and 53% of portfolio companies believe they have the right leaders in place to navigate current disruptions.
• Over 75% of portfolio companies' CEOs are replaced post-acquisition, often unexpectedly, underscoring the challenges investors face in maintaining leadership continuity.
• Data indicates that leadership issues could decrease valuation by up to 35%.

The issues are multi-faceted:

• Misalignment of Goals: Misalignment of stakeholders’ goals in relation to growth, profitability, and timelines for exit leads to conflicting priorities, such as short-term cost-cutting vs. long-term growth investments.
• Leadership Shortfall: Lack of the right leadership leads to portfolio companies missing growth targets or faltering in competitive markets.
• Transition Challenges: Poorly handled leadership transitions result in leadership gaps, cultural upheaval, or founder disengagement.
• Cultural Misalignment: Misaligned cultures following a merger/restructure or clashes between founders and new executives lead to low morale, retention issues, and poor performance.
• Talent Retention: Failure to identify and retain key stakeholders within the portfolio companies or to attract top talent.
• Succession Issues: Lack of strong successors within the portfolio company will destabilize portfolio companies and hinder growth.
• Overall Impact: In summary, a lack of a clear firm-level talent strategy significantly hinders value creation and erodes the rate of return.

Yet the leadership and human capital issues often do not receive enough focus from investors—at least not until problems have already created significant damage to valuation.

How AIMS International Can Help

As experienced human capital partners to investors, AIMS International can help address all these issues by:

• Mitigating Transaction Risks: Through leadership assessment.
• Maximizing Value Creation: In line with the exit strategy by aligning and securing the right management talent for the job.
• Enhancing Organizational Resilience: Through strategic talent management of both remaining and new leaders.
• Fostering Sustainable Growth: By embedding operational efficiencies based on culture and organizational design.

AIMS International Services to Investors

AIMS International can deliver valuable support at all transaction stages—pre, during, and post transaction (i.e., not just after problems have occurred following a couple of years of operation post-investment).

Pre-Transaction

We help set a strong foundation by supporting critical decision-making through analysis of Portco’s organisational structure and its inherent vulnerabilities.

During Transaction

We identify leadership strengths and gaps within Portco to mitigate risks and ensure stability, alignment, and performance during the transaction.

Post-Transaction

We drive sustained, targeted growth within exit timeframes by optimizing leadership effectiveness within Portco.

The losses in valuation caused by a lack of leadership focus for investors are not unavoidable. Engaging AIMS International as a partner early in the process mitigates risk and supports higher returns.

Writing and background by:

• Eric Kearley, Senior Consultant, AIMS Sweden
• Dimitris Kleftakis, Managing Director, AIMS Greece, Executive President, AIMS International
• Lisa Mayo, Managing Partner, AIMS United Kingdom
• Leonie Pentz, Managing Partner, AIMS South Africa, Global Lead, Sustainability, Energy and Natural Resources

Sources: MSCI, Private Equity Info, Pitchbook, S&P Global, Hanover, Russell Reynolds, Codurance, Ontra, Blackmore Partners.