Private Equity Firms Can Improve People Management

Charles Jones doesn’t fit the stereotype of a private equity mogul, or how such moneymen change company cultures.

Jones is founder and managing partner of Bedford Funding, a private equity firm that has bought a number of human resources software companies in the past few years. But while some private equity groups borrow heavily to acquire companies—leading to big debt service payments that can undermine businesses—Bedford Funding has done its deals without debt. And amid tales of selfish financiers sending American jobs overseas to cut costs, Jones did nearly the opposite recently.

When White Plains, New York-based Bedford Funding acquired software firms including Authoria and Peopleclick, it inherited an offshore workforce of a few dozen computer programmers in India. Under Jones’ leadership, the company decided to move those developers to the United States to improve collaboration and ultimately serve customers better. Most of the employees agreed to come over on work permits.

“As opposed to exporting jobs, we’ve imported these longtime employees,” Jones says.

Jones’ tale helps paint a more complete picture of private equity and its effect on companies and people management. Partly because of presidential candidate Mitt Romney’s background at Bain Capital, the private equity industry has come under intense scrutiny in the past year. President Barack Obama and other critics assailed Bain and other private equity firms for laying off workers and bankrupting companies. And overall, coverage of the industry has tended toward the extremes—either blasting the field for cutting jobs and killing workplace cultures or defending it as vital to turning around ailing firms and boosting the economy.

The truth lies somewhere in between.

While horror stories exist, in some cases private equity takeovers can lead to healthy updates of management methods and practices. These can include improved alignment between business strategies and employee rewards, greater focus on key talent issues such as retention and even a willingness to invest in hiring and higher pay.

“Private equity tackles business issues, including HR management, head-on,” says Bob Braddick, a senior partner at consulting firm Mercer who guides its global strategy for private equity. “They are thoughtful and decisive.”

Private equity firms generally take the shape of partnerships in which a group of managers raises money from sources, including pension plans and individuals, to invest.

The firms typically acquire companies and seek to increase their value over the course of several years in the hopes of realizing a profit by selling them or through a public stock offering. Private equity already touches many companies in the U.S. economy, and is poised to expand its reach.

According to the Private Equity Growth Capital Council trade group, there are 2,670 private equity firms headquartered in the United States as well as 15,680 private equity-backed companies based in the country that employ 8.1 million people. What’s more, the global private equity industry has “dry powder”—the trade group’s term for money available for investments—totaling some $900 billion.

The potential for more private equity deals irks industry critics. And they can point to cases that give the industry a black eye. For example, a private equity investment in holiday fruit basket seller Harry & David Holdings Inc. resulted in the company going bankrupt in 2011 even though investors made off with millions in profits, according to a Bloomberg report.

But such disturbing tales aren’t the entire story when it comes to private equity.

Sandy Ogg, operating partner at private equity giant Blackstone, says the field has moved past the days of slashing research-and-development budgets and skimping on customer service at acquired firms. “The industry learned long ago the lessons of ‘Strip it and flip it,’ ” he says.

Before coming to Blackstone two years ago, Ogg held executive HR positions at Unilever and Motorola Inc. Blackstone hired him as part of its efforts to handle effectively the people side of acquired businesses.

Along those lines, this year Ogg spearheaded the creation of a leadership committee designed to work alongside the investment committee that makes key decisions about what firms to buy and at what price. The goal of the new group is to assess the managerial talent needed to carry out the business plan at the acquired company.

Ogg chairs the committee, and it includes the CEOs of acquired companies as well as other operations experts. One sign of the new group’s importance: Blackstone’s legendary CEO also attends the meetings. “Steve Schwarzman is in every one,” Ogg says.

It’s important to recognize distinctions within the industry, says Chas Burkhart, founder of boutique private equity firm Rosemont Investment Partners. Rosemont, which is based outside of Philadelphia and has raised a total of $250 million since its inception in 2000, specializes in ownership transition deals within the asset management wing of the financial services industry. As such, Rosemont may help a group of managers buy out an asset-management business from aging founders or break out from a parent bank.

Burkhart says his firm tends not to take on debt in its acquisitions. And it tends to leave people management matters in the hands of executives that it works with in the acquired company. Rosemont officials have had seats on 23 company boards over the past 12 years but have never exercised a vote.

“We have a very light touch,” Burkhart says.

On the other end of the spectrum in terms of size is private equity firm Hellman & Friedman, which has raised more than $25 billion since 1987 and invested in more than 75 companies. Among its portfolio companies is HR software firm Kronos Inc. Kronos was a publicly traded company in 2007 when investors including Hellman & Friedman took it private in a deal valued at roughly $1.8 billion.

For Kronos employee Dave Ragusa, being owned by a private equity firm hasn’t hurt Kronos’ culture and may have helped it. Ragusa, a Houston-based project manager who implements Kronos software at retail clients, is glad the company doesn’t have to worry about the burdens of the Sarbanes-Oxley regulations facing publicly traded companies. Those federal rules had affected his job in ways including a more complicated, more time-consuming process for making changes to customer work.

He’s also grateful that longtime CEO Aron Ain remains at the helm, where he has shown sensitivity to military reservists like Ragusa.

Ain has a policy to make up the difference between Kronos’ annual pay and the pay employees get during military service when they are called up. That has remained in place under Hellman & Friedman ownership.

And in 2010, Kronos allowed Ragusa to spend a year away from work at the US Army War College, where he’d been offered a training opportunity given to just 2 percent of his reservist peers. While some employees of organizations taken over by private equity firms have bemoaned their new owners, Ragusa has no complaints about the arrival of Hellman & Friedman and no plans to go elsewhere.

“Someone would have to really knock my socks off for me to leave Kronos,” Ragusa says.

Ragusa apparently isn’t alone. Employee-satisfaction scores are higher at the company now than before it was bought by Hellman & Friedman, Ain says. The shift to private equity ownership meant the loss of just one job, Ain says. It was the company’s investor relations specialist, who was offered other positions at Kronos but decided to leave.

At the same time, Kronos gained management expertise from Hellman & Friedman, Ain says. “They’re really smart,” he says. “They’re always giving me ideas.”

For example, Hellman & Friedman prompted Ain to take a look at his sales force turnover rate in 2008. With that turnover running north of 30 percent the previous year, Kronos received the approval of Hellman & Friedman to invest $2 million in having management consultants come in to study the situation.

Their advice was to boost sales-force compensation by some $6 million. Again, Hellman & Friedman gave Ain the green light, and Kronos spent the additional money.

“They said do it,” he recalls, noting this was a decision taken in the midst of the recession.

Sales force turnover retreated into the “low teens” by 2009 and remains there today. To Ain, the investments have paid off. Kronos’ annual revenue has jumped from about $600 million at the time of the Hellman & Friedman acquisition to close to $900 million.

The kind of people-related investments Hellman & Friedman approved at Kronos are not uncommon, says Mercer’s Braddick. He says private equity firms have a certain urgency stemming from their goal to increase the value of the acquired company within a particular time period, which may be three to five years.

“There is a defined window to execute the business strategy,” he says. “If there’s a strong business case, they will invest in the business, and they will do it quickly.”

In addition, Braddick says private equity firms have beefed up their capabilities to help portfolio companies handle talent matters in the past decade or so. This includes turning to consulting firms such as Mercer, which offers private equity firms assistance with issues such as benefit programs, employee engagement and employee communications.

Braddick says private equity groups also have hired ex-HR executives—think Sandy Ogg—who can then counsel acquired firms.

That’s not to say everything always goes smoothly these days with private equity deals. Jones and Bedford Funding, for example, experienced a rocky leadership patch at the HR software firm they assembled.

In April 2010, Jones brought in an outside manager to oversee Peopleclick Authoria. But a number of former Peopleclick and Authoria employees grew dissatisfied with CEO Joe Licata’s management style and quit or announced plans to leave. In November of that year, Licata left and Jones stepped back in as CEO. He rehired at least 13 ex-staffers and issued stock options to each of the company’s 500 employees.

Licata, who currently serves as a director of electronics manufacturing company Sanmina-SCI, couldn’t be reached for comment.

Jones declines to talk about the details of that tumultuous period. But he says getting leadership right is tricky when stitching together companies. Melding multiple firms into one is what he has done at his HR software business, which was rebranded Peoplefluent in 2011.

Executives capable of overseeing a company with $5 million in revenue may not have the skills to lead a firm with $100 million in revenue, Jones says. In addition, if you are seeking to turn a collection of several software companies into a unified business with one head of finance and one head of development, there is going to be a shake-up among the executives of the previously independent firms.

At this point, though, Jones says Peoplefluent is on the right track. One sign of this is strong results for the quarter ended in September, when Peoplefluent reported a 28 percent increase in annual recurring revenue year over year. Employees, Jones says, are generally happy with president and CEO Gerard Murphy, who took the reins of the private equity-owned company in June.

“There’s a period of time of intense change,” Jones says. “People overall are more enthusiastic than they were three years ago.”

Ed Frauenheim is Workforce’s senior editor. Comment below or email editors@workforce.com.