The landscape of private equity value creation is ever evolving. The era of accessing returns primarily through financial engineering – be it entry/exit multiple arbitrage, aggressive leverage, cost-cutting initiatives, and operational streamlining – is waning. As entry valuations become more and more efficient pricing in the future value of “table stakes” value creation methods, private equity firms are increasingly recognizing that the sustainable path to outsized returns lies in more fundamental approaches.
This shift is taking the form of a rewrite of the human capital section of the value creation playbook, one that emphasizes the strategic development and full utilization of a portfolio company’s most critical asset: its human capacity, rather than its human capital.
FROM HUMAN CAPITAL TO HUMAN CAPACITY
For an enlightened group of private equity investors I am engaged with, the human capital playbook goes beyond traditional training and leadership development programming and into a more holistic approach to identify and enhance the human capacities of leaders.
Traditional human capital development often views individuals as a collection of skills and competencies to be acquired or refined, primarily to meet specific organizational needs and drive economic productivity. It focuses on training, upskilling, and credentialing to fill defined roles and optimize output.
In contrast, cultivating human capacity takes a broader, more holistic approach. It delves beyond technical skills to foster intrinsic human potential, including innate psychological resources like resilience, the capacity for positive emotions, and a deep sense of meaning. This perspective aims to unlock an individual’s complete potential, enabling them to adapt, innovate, and thrive across all life domains, unlock the power of character strengths and virtues, leading to more sustainable personal wellbeing and broader organizational flourishing.
HUMAN CAPACITY: THE NEW ALPHA IN PRIVATE EQUITY
In this new paradigm, the executive leadership team is no longer just responsible for setting strategic direction and managing execution; they are the stewards of the culture, the work environment, and the experience of working for the organization, which drives the tone, tenor, and affect of the experience of work. The individual and collective human capacity of the leadership to inspire, guide, compassion (yes, it’s a verb) and lead positively and consciously directly influences:
- Strategic Vision & Execution: The ability to identify new market opportunities, formulate robust growth strategies, and translate them into actionable plans.
- Innovation & Adaptability: Fostering a culture where new ideas flourish, and the organization can pivot effectively in dynamic markets.
- Talent Attraction & Retention: Building a compelling employee experience that attracts and retains top-tier talent is essential for growth.
- Operational Excellence for Growth: Moving beyond mere cost efficiency to optimize processes that scale and support expansion.
STRATEGIES FOR CULTIVATING AND ENHANCING THE HUMAN CAPACITY OF LEADERS
For private equity and venture capital firms looking to unlock this next frontier of value creation, a deliberate and strategic investment in cultivating and enhancing the Human Capacity of Leaders in their portfolio companies is paramount. These practices are applicable whether a firm has a mature value creation team or is just beginning to formalize its approach to human capital:
- Implement Strategic Leadership Assessments: Move beyond traditional competency models to assess leadership capacity for critical growth-oriented behaviors such as psychological safety, resilience, adaptability, and an abundance mindset. These assessments should inform tailored development plans for individual leaders and the executive team as a whole.
- Invest in Comprehensive Executive & Team Coaching: Make formalized coaching programs designed to enhance human capacity available to CEOs and their direct reports. This isn’t merely remedial; it’s about optimizing high performance, enhancing strategic thinking, improving decision-making, increasing self-awareness, and fostering effective team collaboration. Firms can begin with targeted pilot programs for key executives and scale as success is demonstrated.
- Leverage Wellbeing as a Performance Lever: Proactively offer wellbeing-enhancing tools and programs (e.g., stress management, mindfulness training, resilience building, executive wellbeing assessments). Recognizing that leaders operating at peak mental and physical capacity are more innovative, decisive, and capable of navigating the inherent pressures of PE/VC-backed environments, this investment supports their sustained high performance.
- Cultivate Character Strengths and Values Alignment: Support leadership teams in identifying their inherent character strengths (e.g., through assessments like VIA Character Strengths) and actively assessing the alignment between their daily actions and their core values. This moves beyond aspirational statements to ensure leaders are operating authentically, which enhances their impact and fosters trust within the organization.
- Champion Positive Leadership Practices: Introduce portfolio company boards and management teams to programs that support the cultivation of positive leadership behaviors at every level. This includes fostering a positive climate, building high-quality relationships, employing positive communication (including delivering constructive negative feedback), and imbuing work with positive meaning. These practices lead to profound ripple effects in organizations.
THE TANGIBLE RETURNS OF HUMAN CAPACITY INVESTMENTS
As Kim Cameron, the esteemed William Russell Kelly Professor of Management and Organizations at the Ross School of Business at the University of Michigan, states, organizations that optimize their human capacity and are guided by positive leadership can produce “deviantly positive results.”
Measurable returns that directly contribute to fundamental value creation include:
- Accelerated Organic Growth: Enhanced leadership, grounded in well-developed human capacities, drives more effective market penetration, product innovation, and customer engagement, leading to higher revenue growth. Research, including that supported by the VIA Institute on Character, demonstrates that leaders who know their character strengths and proactively work to apply them in their work exhibit higher job performance, increased work engagement, and contribute to more positive organizational outcomes.
- Improved Strategic Execution: Aligned and capable leadership teams, operating with heightened human capacity, execute growth strategies more efficiently and effectively.
- Higher Employee Engagement & Retention: Strong, inspiring leaders, equipped with greater human capacity, foster positive cultures that attract and retain top talent throughout the organization, reducing costly turnover by creating a more meaningful and engaging work experience.
- Enhanced Organizational Resilience: Leaders with well-developed human capacities can navigate economic volatility and market disruptions more effectively, safeguarding and even growing value amidst uncertainty.
- Superior Financial Performance: Ultimately, these factors combine to deliver higher EBITDA, stronger cash flows, and increased enterprise value, translating into superior returns for limited partners.
In an increasingly efficient market where traditional value levers offer diminishing returns, the strategic cultivation of human capacity within portfolio company leadership teams has the potential to become a potent vector for enhancing investment returns. For private equity firms, this isn’t just a progressive idea; it’s the strategic imperative for securing competitive advantage and driving truly sustainable growth.
