Private Equity firms hold an interesting place in the global economy, equal parts praised by the investment marketplace for historically high rates of return and vilified by industry stakeholders and those employed by the companies they acquire or in which they take major investment positions. Because they focus on improving underperforming companies and delivering returns that exceed those from traditional Wall Street securities, they appeal strongly to institutional and wealthy stakeholders. For the industry’s HR leaders and professionals, the challenges and opportunities to make an impact are similarly scaled and require a special blend of competencies and skills that match the speed and intensity of how these businesses operate. Private equity HR offers an exciting, fast-moving, and ever-changing work environment.

Understanding the Private Equity (PE) industry

First established after WWII to make private investments in, and take advantage of the ideas and inventions of returning American GIs, what started out as “(ad)venture capitalists” of the 1940’s evolved into the leveraged buyout (LBO) companies of the 1970’s that became famous for their corporate takeovers of large global brands, and since the 1990’s have become an industry with a vast global reach. The University of Chicago estimates these firms hold between $8 trillion and $9.4 trillion in assets under management (AUM), covering almost 12,000 companies that employ more than 11 million American workers.

Unlike publicly traded stocks, bonds, mutual funds, and ETFs, PE firms raise (or borrow) private funds from high-net-worth individuals and large institutional investors (pension funds, insurance companies, universities, etc.) and combine them with heavy borrowing assigned to the acquired company. The result of that “leveraged buyout” is that the acquired company takes on an additional debt load that it must service from its cash flow (more about that below). 

The new ownership group then creates financial value for its investors (and generates additional funding to repay loans) by reducing operating expenses, improving operational efficiency, and driving profitability, thereby increasing the company's value over 5-10 years. After that point, the objective is to create a liquidity event in which investors can realize a cash return through an initial public offering (IPO) or a sale to another company. 

In exchange for providing the investment, a PE company acquires equity or ownership rights and exercises control over the acquired (“portfolio”) company’s strategies and operations through board seats and formal management rights agreements. Through those rights, the PE firm can hire and assign top leaders, restructure the organization, make financial and budgetary decisions, and enter into outsourcing partnerships on behalf of its portfolio companies. 

By AUM, the largest and best-known private equity firms are Blackstone, Brookfield Asset Management, Ares, Apollo Global Management, KKR, and the Carlyle Group. The market tends to be dominated in terms of AUM and the largest volume of capital raised by these funds by the top 5-10 firms. PE firms tend to specialize in industry groups (technology, healthcare, industrials, financial services), geographic markets, and/or business circumstances (turnarounds, company size or maturity), and the majority (over 70% in some listings) are US-based. They use funding sources ranging from venture capital (VC) to growth or mezzanine financing, LBOs, and distressed buyouts. 

The industries that PE firms most prominently invest in include those in software and technology, healthcare (devices, suppliers, and providers), industrials (manufacturing, machinery, services and repair, transportation), infrastructure and energy (data centers, renewables, ports, toll roads, utilities), and financial services (wealth management, fintech, brokerages). Other emerging industries include for-profit education, childcare, real estate, consumer and retail, media, and telecommunications. These industries tend to be heavily fragmented, recession-proof, and/or have predictable, recurring revenue streams.

Common PE firm issues and challenges

An awareness of the common challenges facing the industry is crucial for private equity HR leaders as they work to make a lasting impact. For example, despite a long-standing trend of delivering financial returns (10-15% annually) that exceed public investments, recent reporting by The New York Times and other outlets suggests the industry is slowing. After years of low interest rates that made borrowing and leveraged buyouts attractive, rising rates have hurt portfolio companies' sales. That directly affects how long PE firms hold those companies, reducing projected cash distribution schedules. In fact, PEs are now holding almost 34,000 unsold portfolio companies valued at $3.8 trillion, with ownership times extended to about seven (7) years.

The higher financing costs and slower exit rates are also changing the valuation equation. Apollo reports that PEs that focus on generating higher profits through “operational value creation,” rather than (primarily) depending on market conditions and timing, are increasingly outperforming their competitors.

Taking on additional debt that must be serviced from cash flows, while creating profitability-enhancing savings and efficiencies, can put tremendous pressure on delivering customer and operational outcomes related to product or service quality, timeliness, and pricing. Reduced staff and resources can also magnify pressures on leaders and employees, potentially diminishing worker safety, stress, engagement, and wellbeing. In fact, the profit pressures often override long-term value creation that would otherwise come from additional investments in portfolio company infrastructure, technology, and/or people. 

Research has found that companies acquired via LBOs experience higher bankruptcy and distress rates, raising the risk profile of such acquisitions and incentivizing profit-taking over further investment. As a result, private equity HR leaders must continuously monitor business trends and stay adaptable, ready to respond with meaningful, business-aligned strategies and tactics.

Private equity HR challenges and pressures

Private equity HR leaders and teams regularly face common issues that require heightened awareness, quick decisions, and resourceful solutions. Managing HR requirements at both the PE firm and portfolio company levels can be demanding, but for business-savvy, creative thinkers who are decisive and quick to act, these challenges are manageable and often invigorating.

Short timeframes

Unlike most corporate environments, which use long-term strategic plans to define goals for continued growth and prosperity, PE firms focus on generating significantly improved results in 5-7 years before exiting through a sale or IPO. As a result, once the investment is complete, private equity HR functions must assess, implement, and manage a series of time-limited changes to an entire organization's management, staffing, structure, resourcing, and goals. The speed of change is highly disruptive to leaders and employees alike, and a need to return to operational stability requires private equity HR teams to balance business requirements with the needs and reactions of those who must deliver the work.

Limited HR due diligence

HR’s role in mergers and acquisitions is commonly shortchanged, ranging from no involvement to after-the-fact reviews to limited time and access to the needed data and information. Hidden risks often result from superficial HR due diligence that fails to uncover significant cultural, regulatory, and legal liabilities. Candidate portfolio companies trying to make themselves attractive may manage expenses and profitability through questionable employee classification and overtime practices, mask toxic leadership and management behaviors, and provide talent reports and KPIs that present the company in a better light. Without comprehensive insights, HR’s ability to make an immediate impact is limited, leaving the team to play catch-up after the deal closes.

Attrition escalation

Companies acquired by private equity firms typically see a sharp increase in attrition after the acquisition. PEs typically replace top leadership and conduct layoffs after the acquisition, then impose stricter expense management policies, increase performance oversight, and reduce work resources and flexibility. These changes to work processes, rules, and ultimately company culture inevitably lead many remaining employees to search for new jobs. Even when “stay bonuses” incentivize critical-skill and essential workers to stay for a minimum period (e.g., 12 months), voluntary termination rates rise after those agreements expire.

Need for financial, operational, and data expertise 

PEs are financially driven organizations that rely on sophisticated analyses and models to assess and decide which industry segments and companies to target for acquisition. Private equity HR leaders must be data literate, understand how the company(ies) generate value, where the levers that enhance revenue and manage expenses lead to profit, and how to best manage workers' skills and deployment to achieve those ends. This requires HR to read and interpret metrics and reporting that provide insights into operational shortcomings and opportunities. It also challenges HR to (ideally) generate insights that indicate the impact of people and HR processes on business outcomes, operational effectiveness, and financial returns and efficiencies.

Adaptive and agile management

PE firms’ portfolio companies face different priorities and focus as new ownership is installed, new leaders assigned, market approaches shift, operational and organizational changes are implemented, and revenue and expense management demands rise in importance. It is essential not only to respond to these changes, but to anticipate them and who they will affect. After things “settle down” and new roles and requirements are in place, even small changes to company tactics and strategies can create a need to adapt HR policies, programs, practices, and platforms.

Centralized controls over portfolio companies

Private equity HR leaders in portfolio companies must be prepared to receive and act on new guidance and direction from a parent organization. While strategic decision-making authority is often taken out of local hands, local leaders still often operationalize those decisions. Pre-acquisition preferences and plans are subordinated and must be negotiated, as PE firm leaders seek to optimize and harmonize processes and resources across portfolio companies in the same, similar, or entirely different industry segments, states of business maturity, and leadership cultures. An equally challenging capability is building an HR business case and effectively conveying local needs that require approvals and resourcing.

Managing HR in and across portfolio companies

Private equity HR leaders and senior contributors can and should be prepared to bring fresh ideas and thinking to their leadership teams, as industry experts are increasingly calling for a return to operational improvements as the value-generation engine in PE acquire-and-hold strategies. At the same time, some of these experts see private equity HR functions as having a higher ceiling and a competitive differentiator, as most financial, operational, and outsourcing strategies are already widely used and adopted across the industry.

HR operates in two distinct contexts in PE: across the firm’s investments and within individual portfolio companies. While various strategies and capabilities can be exercised in both, those to be prioritized in each include:

Managing HR across portfolio companies

PE HR leaders can create leverage across investments through common standards, shared capabilities, and disciplined processes that improve speed, consistency, and cost-effectiveness. Their role includes providing practical support and clear guardrails while allowing sufficient flexibility to reflect differences in industry, size, maturity, and operating needs.

1. Establish a replicable and comprehensive HR due diligence approach

Private equity HR leaders should respond to the regular cadence and repeated process of portfolio company acquisitions and investments by creating a repeatable, value-adding due diligence process with playbooks and templates designed to be time-, effort-, and cost-efficient. Standard templates and efficient collection methods for data, policy, process, system, legal, and staff background requests are a critical starting point. Generative and Agentic AI capabilities can aggregate, calculate, and summarize information, and trained HR team members can evaluate the output and identify status, risks, and opportunities.

2. Establish change management strategy and governance standards

Leverage the PE firm’s financial, business, and HR assessments, objectives, and plans to establish a standardized approach to building formal change management strategies for use in newly acquired companies. Build these to communicate the vision, value-creation objectives, and expectations, and to educate and engage new and remaining leaders and employees. Leverage common-use employee listening tools and methods to assess employee understanding, acceptance, and adoption of the changes they experience, and offer structured guidance and consulting to local HR teams to enable local ownership of results and improvements.

3. Create shared, common-use systems and support

Achieving cost-effectiveness with shared (but separate and protected/cyber-secure data) payroll and HR systems, much like in a large corporation with separate business units and operations needing access to their own insights. Develop HR operational playbooks that provide step-by-step guidance on designing and implementing efficient best practices. While HR processes may differ based on industry, region, operations, company size, or employee-type requirements, shared resources, processes, or tools can unlock unexpected savings and efficiency gains.

Similarly, private equity HR teams should consider establishing small, agile, responsive Centers of Excellence (COE) teams to serve as expert advisors to portfolio companies in areas such as HR measurement and reporting, leadership development, or succession management.

Common-use HR shared service centers and outsourcing bring operational efficiencies at scale by giving portfolio companies access to better, more cost-effective automation, replacing time-consuming support services (e.g., benefits, employee relations, state/federal compliance monitoring), and providing access to volume-priced outsourced vendors.

4. Establish “freedom within a framework”

Create standards for portfolio companies with boundaries and guidelines for HR policies, processes, programs, and practices, while encouraging intelligent personalization. Encourage companies to leverage best practices while keeping responsibility for adapting them to solutions that match each company’s size, resources, maturity, and capabilities.

5. Create a focus on rapid but value-adding HR

Given the short-term nature of the investments and expectations for above-stock-market returns, pressure on HR teams to deliver requires advanced thinking and action. For example, use statistically predictive methods to identify the HR strategies and talent processes/practices that drive business, financial, and operational gains, and promote and track them as improvement priorities. Similarly, encourage the use of foundationally sound, proven practices using evidence-based HR (EBHR). This approach leverages academic and industry research, internal (quantitative and qualitative) trend analyses, and advanced analytics to identify best-fit solutions to reduce costs and waste, increase productivity, and enhance employee engagement, employee experience, and company culture.

6. Target operational improvements in HR

Private equity HR leaders at the firm investments level should continuously “pound the drums” and proactively encourage HR teams at all levels to drive improvements in operating efficiency, no matter how small or large. This priority signals the urgency of the value-add HR can contribute to the business while serving as a role model and reminder for operating company leaders to do the same. In that light, consider adopting Lean, Agile, Six Sigma, or other structured process-improvement approaches. HR can leverage the expertise it gains by considering the use and deployment of “SWAT” teams of trained experts to facilitate quick-turn process improvement efforts in business and HR process workflows.

7. Ensure that the right leaders are in place

Workforce, talent, and succession planning are essential processes for private equity HR teams, especially across investments. As industry research suggests that as many as 70% of acquired companies’ top executives are replaced while operating as part of a PE, and the urgency to meet aggressive growth and profitability plans are substantial, top leadership changes are frequent and expected. As a result, overseeing the placement and replacement needs as the portfolio company adapts to and evolves toward its objectives is a critical private equity HR requirement. Having robust industry talent contacts, talent intelligence capabilities, candidate relationship management processes and systems, leadership development, and succession management capabilities are essential.

8. Plan for exits

Life in a PE is about buying and selling companies for a profit. That said, a portfolio company’s human capital value proposition must be attractive. That requires planning staff volumes and skills relative to a defined timeframe; talent processes and systems that operate with low friction; proactively managed, minimized legal risks; optimized labor costs; and a capable workforce that is properly motivated and aligned to meet organizational objectives. All of this in a five-to-seven-year window of opportunity, often with small/”lean” HR teams, which is no small task.

Managing HR in portfolio companies 

Leading private equity HR teams within portfolio companies comes with many challenges, but capable HR professionals can significantly contribute to the larger firm’s success. The opportunity calls for flexibility and disciplined approaches aligned with business, financial, and operational priorities. It requires agility and adaptability, a constant focus on cost management, a passion for delivering results, and preparation for a sale.

1. Make transformation a primary focus 

Change management takes center stage for private equity HR teams. Because portfolio companies are often in the small- to medium-sized business (SMB) space, HR leaders must be resourceful and ready to build the function’s capability to support and guide the speed and depth of change needed to deliver the required returns on investment. This requires creative, planned approaches to understanding the business and operational changes to be effected, who will be impacted, what they need to understand, and how they will be engaged to accept and adopt those changes.

2. Assess employee skills and culture

Effective right-sizing, staff selection and deployment, and critical capability gap remediation all require good data and insights into the employees and their skills. Evaluating employees' skills and capabilities, especially in vision- or mission-critical roles, is crucial to understanding what is needed to meet aggressive goals in a portfolio company. It also brings greater clarity when hiring new or replacement workers, who are often sought out at a lower salary level. Skills-based HR (hiring, development, mobility) better identifies qualified talent with extensive experience but without a college degree. 

Equally important is assessing the culture and how much it contributes to or hinders employee focus, productivity, and performance. Prioritize shifting the culture to meet strategic performance requirements, leadership demands, expense-management focus, and adapting to changes in work processes.

3. Optimize leadership, management, and team effectiveness

While leadership and managerial effectiveness are crucial to employee focus, performance, and engagement, PE firms tend to have leaner teams and fewer managers. Emphasize hiring and developing agile, adaptive leaders by clearly defining the competencies and skills they need to transform the organization. Build talent pipelines that identify future leaders with those desired traits and capabilities, and develop them through hands-on, experiential methods. 

Create a focus on team effectiveness that can become a critical competitive capability. The more capable employees are and the less day-to-day management they need, the more people managers can guide, coach, and develop.

4. Build HR analytic capabilities

Data literacy is an essential skill for private equity HR leaders and their teams to possess and develop. Because the leaders they support rely heavily on data and analysis to track and decide on operational performance, HR professionals need to understand and speak this language. Understanding how to read, evaluate, and act on business, financial, HR, and talent insights is a must-have.

Relevant Practices & Tools

Advanced Lean HR Practices to Evolve HR into a Strategic Business Partner in Organizational Transformation. >

Lean HR teams must adopt a learner’s posture—curious, data-driven, and open to feedback—even when it reveals legacy practices that no longer serve the organization’s needs... more »

Implementing Agile Teams to Respond to Dynamic Market Environments. >

Organizations have traditionally relied on organizational designs with top-down direction, fixed management and team structures, and static cross-team coordination requirements... more »

Applying Lean Analysis to Assess Levels of “Flow” and “Waste” in Current HR Processes. >

A core element of Lean focuses on transforming HR into a data-informed, continuously improving system. “Flow” is the movement of value across a process without interruption, confusion, or delay... more »

Generating a Critical Talent Plan to Close Projected Gaps. >

A critical talent plan defines the specialized and concentrated efforts that will be undertaken for those roles deemed to be of the greatest importance to meeting the organization’s strategic objectives... more »

The Internal Environmental Scan Tool: Capture and Categorize Factors Internal to the Company Impacting its Objectives. >

This template provides a structure for identifying key internal topics that should be considered in a formal analysis of the business’s upcoming challenges... more »