Soft factors: The next big thing in private equity

New research shows that investors need to pay more attention to soft factors if they want to be successful in the future. Growth businesses are well-advised to prepare for greater organisational scrutiny.

Private equity is becoming ever more competitive with low interest rates and the abundance of capital to be invested. Investors are caught in the conundrum of having lots of money to invest, but very few investment opportunities as every potential target quickly amasses interest from a large wolf pack of starved buyers –all forced to find a deal.

The result is increasing valuations further complicated by a de-facto standard auction process with less access to the target organisation and less time to prepare an offer to stay in the running. We are in a seller’s market.

Emerging as the victor from such a feeding frenzy is a new challenge for private equity investors: how to realise the already stretched business plan and make a good return despite having paid a premium price?

A new value

After financial engineering and operational excellence, investors are looking for new ways to create value.

“Everybody knows that financial expertise is no longer adequate, you need to have operational competence. But operational capabilities have now been implemented, particularly in the larger funds,” says Mirja Lehmler-Brown, senior investment manager at Aberdeen Asset Management. “Because there is so much capital in the market and the prices are full, funds need to add new layers to what they do in order to grow value.”

A new Humatica study across European fund managers and private equity professionals shows that addressing soft factors represents the next wave of value creation. By focusing on organisational excellence, investors can accelerate operational excellence and push up returns.

Assessing the organisation early, buyers can identify implementation red flags during the bidding phase and allows them to define required actions immediately after deal closing, start corrective actions early to de-risk the investment, and leverage organisational strengths.

It also means that growth businesses wanting to attract capital for further expansion should expect greater scrutiny of their organisations in addition to their hockey-stick business plans.

Related: Advice on selling equity in a business

Research results show the importance of organisational factors. 51% of survey respondents state that soft factors are a key contributing factor to failing to deliver the expected business results from an investment. Another 45% claim it plays a part and only 3% believe that it has a negligible impact.

Soft factors – hard assessment

Yet, despite the impact soft factors have on performance, little attention is given to their rigorous assessment. Only 30% of investors surveyed conduct organisational due diligence. Of those, only 16% carried it out with a structured approach.

Unlike established due diligence practices, organisational due diligence has no best practice. “I’ve been working for 20 years in this industry and never in my life have I had a decision that is as multifaceted and complex as an investment decision.

Only a fraction of it is measurable. We used to disregard organisational factors, but they are now the big elephant in the room.”

Contrary to conventional wisdom, getting the right CEO is not the most important organisational factor for surveyed investors. Rather, getting the right management team in place is considered the top organisational success factor, twice as important as focusing only on the CEO. “The single biggest risk is having the wrong management team –and finding out two years later.”

The good news is that a solution is in sight. With the input of 85 private equity professionals, Humatica’s research presents a set of concrete practices that should be applied when investing:

  • Transforming the current unstructured approach to a systematic, modular organisational due diligence process, which connects multiple parties and information thereby objectively analysing soft factors in a structured manner
  • Aiming at a focused and prioritised assessment on the organisational risks/opportunities with the highest impact on value creation dependent on the deal archetype
  • Evolving the current internal teams by adding in-house and external expertise and developing deal teams further, sensitising teams to the impact of organisational implications

The obvious hurdle in today’s investment environment is of course getting access to people in the target company and to do an analysis without adversely affecting the fragile relationship and ongoing trust-building with the management team.

Humatica’s work in the space of white collar performance improvement shows that both of these barriers can be overcome with an understanding of the specific key organisational performance challenges for the particular company, in Humatica’s case this is a database of organisational performance benchmarks collected over the past 12 years.

However, most investors do not have access to that kind of information and rely on their gut feel – which is sadly not sufficient to make informed decisions.

For investor who want to lead the pack in returns, addressing the soft factors to achieve organisational excellence delivers a competitive edge and enables them to catch the third wave in private equity.

As Reine Wasner, Partner at Humatica, says “Investors have realised that to achieve operational excellence they first need to achieve organisational excellence.”

Read more about the study “The Third Wave: Organisational due diligence – Riding the next wave of value creation” on

Praseeda Nair

Kellen Rempel

Praseeda was Editor for from 2016 to 2018.