In the turbulent world of private equity, successful acquisitions now depend on more than a sound financial strategy and process improvements. Cultural alignment and leadership adaptability have become essential.
And when you don’t get it right, the results are dramatic. Acquisitions that fail to account for culture and leadership are significantly prone to failure. Ernst & Young research indicates that up to 60% of PE-backed companies don’t reach their expected returns as a consequence of disregarding these critical factors.
There is a complex interplay between leadership, culture, and communication within acquired companies, and we have to drive for strategies that go beyond the numbers.
This article covers the following topics:
- Alignment of Culture and Leadership Matters
- Behaviour Drives Strategy
- Leadership and the Importance of Coherence
- Case Study: The Impact of Cultural Sensitivity on a Family-Owned Business
- The Lessons We Have Learned
- Five Key Principles for PE Firms to Consider
- Incorporating Leadership Strategies into Private Equity: The Path Forward
- Conclusion: Culture and Behavioural Strategies in Private Equity
And if you don’t have time to read it all right now, here are the headlines:
- Cultural Fit and Leadership Alignment – up to 60% of PE-backed businesses struggle due to cultural and leadership misalignment. Aligning on purpose, values, and communication strategies before finalising acquisitions can mitigate future conflicts and improve performance.
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- Integration Expertise as a Success Factor – using experienced integration specialists to bridge operational and cultural differences can boost first-year performance by up to 25%. This approach respects legacy practices while driving growth.
- Data-Driven Culture Assessment – tracking qualitative data on employee sentiment and cultural alignment alongside financial KPIs is essential. Firms with strong engagement and cultural alignment see 2.3 times better financial performance.
- Empathy in Communication – communicating with empathy, especially regarding legacy practices, reduces resistance and builds trust. Leaders who use empathetic language achieve 60% higher team engagement.
- Retaining Cultural Stewards – retention of key talent familiar with company culture directly impacts long-term value creation. Proactive integration strategies help retain these individuals, securing both cultural continuity and performance stability.
Alignment of Culture and Leadership Matters
Particularly in sectors with intense competition, a business’s internal energy and culture is a defining competitive advantage, influencing customer perceptions, employee engagement, and overall performance.
Energy – whether positive or negative – spreads throughout an organisation, significantly affecting team morale and productivity. This phenomenon, known as the “contagion effect,” implies that the tone, actions, and communication styles that leaders use throughout a business are directly influential.
Leaders in PE-backed companies face the pressure of producing quick wins for investors, and this urgency inadvertently propagates stress across the organisation. Anxiety or apprehension that originates from senior leadership diffuses outwards, dampening morale and distracting employees from performance goals.
It’s worth noting that Boston Consulting Group reports that 20% of executives involved in PE firms cite cultural integration as a primary driver of under-performance in recent acquisitions.
Behaviour Drives Strategy
One of the key foundations of our work with clients is that knowing a strategy is not the same as executing it.
Knowledge is definitely not the same as behaviour.
For a strategy to translate into results, it must be energised through deliberate acts of leadership, repeated behaviours, and the cultural stories that leaders create. Leadership isn’t just about making decisions; it’s about consistently demonstrating the behaviours that align with the organisation’s values and goals. Tone, language, and recurring actions are what drive the cultural narrative and, ultimately, the success of the business.
Our role in PE-backed businesses is to support leaders in crafting and sustaining these behaviours. We work deliberately to help leadership teams enable the behaviours that will deliver their strategy, focusing on social navigation. Guiding them through predictable challenges and facilitating open, candid discussions, especially at the emotional level.
Leadership and the Importance of Coherence
Leadership is about much more than process optimisation and financial strategy – it’s about the coherence of three drivers: logic, behaviour, and emotion.
If leadership teams want to engage and motivate others, these three elements need to be comprehensively aligned. In the case study that follows, we tell the story of how a failure to recognise the emotional impact of decision-making leads to the disintegration of a once-thriving business relationship.
This case is not unique in the world of PE acquisitions. The early stages of any acquisition are critical for setting the tone of the relationship between the PE firm and the acquired business. Leaders need to engage in open discussions about purpose, strategy, and how to handle inevitable challenges.
Without this dialogue, emotional disconnection can undermine even the most well-intentioned plans.
Case Study: The Impact of Cultural Sensitivity on a Family-Owned Business
Consider the experience of Peter, a fourth-generation funeral business owner, whose company’s stability and consistent cash flow made it an attractive acquisition for a PE firm. His business was deeply rooted in a “family serving families” culture, and his goal in joining the PE group was to access capital to expand.
Peter had the option to “cash out” after three years, subject to meeting agreed targets. But at the beginning this wasn’t his priority; expansion was his driver and he was confident of hitting his targets.
However, despite a promising start, the relationship between Peter and the PE finance director soon grew strained. The finance director’s drive for cost-cutting – focused on removing what he viewed as “unnecessary” practices – collided with Peter’s belief in maintaining traditions that customers valued.
These practices included memorial events for families, held at no charge. A practice spanning over three decades, with daily fresh flowers in chapels of rest. The finance director’s insistence on questioning each cost as a profit centre was logical but disregarded the emotional significance these gestures held for customers.
Over time, Peter’s vision for expansion stalled, and he became disillusioned with the direction of travel. By the end of his three-year term, Peter disengaged and used his network to launch an independent funeral supply business. In the meantime, his former funeral business saw diminishing returns.
This story underlines the potential consequences of overlooking cultural fit and communication. The finance director failed to appreciate the emotional and cultural considerations that were critical to Peter’s legacy business. This, in turn, led to a breakdown in trust and, ultimately, long-term value.
Peter’s exit was a significant loss, but it was a situation that could have been avoided with a different approach on both sides.
The Lessons We Have Learned
In our work with PE firms, one of the key lessons we’ve learned is the importance of early intervention. Behavioural strategies should be addressed from the start of any acquisition, with both sides open to exploring how leadership behaviours and energy will be managed. Early critical incidents, like those Peter experienced, can lay the foundation for either long-term success or failure.
Unfortunately, in Peter’s case, we were unable to engage the Finance Director in a meaningful dialogue. He viewed us as “Peter’s people” and resisted our efforts to broker a more collaborative relationship. This experience has reinforced the need to involve all key players in the behavioural strategy from the outset, ensuring that leadership teams are aligned not just on logic but on behaviour and emotion as well.
Five Key Principles for PE Firms to Consider
The story of Peter’s business highlights several critical strategies PE firms can use to create smoother transitions and more successful acquisitions:
1. Align on Purpose and Values Before Closing
Aligning on purpose and values before finalising an acquisition can prevent future discord. McKinsey research shows that companies with clear alignment on mission and culture experience 30% fewer cultural conflicts post-acquisition, making it a significant driver of success. By establishing shared values and expectations, PE firms can better integrate their vision with the portfolio company’s foundational beliefs.
This alignment is particularly important for family-owned businesses, where deep-seated values usually define the company’s identity and customer loyalty.
2. Embed Cultural and Integration Expertise
Integration is where the most value is captured or lost. To mitigate risk, top-performing PE firms assign experienced integration professionals with cultural sensitivity to their portfolio companies. A study by Bain & Company found that PE firms that use dedicated integration specialists see a 25% improvement in first-year financial performance.
These professionals help bridge the gap between operational goals and cultural nuances, ensuring that the transition respects the legacy practices that hold value for the acquired company’s team and customers.
3. Utilise Data to Gauge Culture and Employee Sentiment
While financial metrics are critical, they cannot tell the full story of an acquisition’s performance. Data can also be leveraged to understand employee sentiment, track engagement, and assess cultural fit. Measuring these “soft” metrics as regularly as financial KPIs, combined with robust employee engagement and cultural alignment drives 2.3 times higher financial performance post-acquisition compared to firms with only financial-focused metrics.
By collecting qualitative data, PE firms gain a clearer understanding of whether the organisation is aligned and performing cohesively, allowing for early course corrections.
4. Communicate with Empathy and Respect for Legacy
Effective communication is crucial, particularly when delivering directives that may seem threatening to a legacy-driven culture. Empathetic, transparent communication helps foster trust and reassures teams during uncertain times. Research from the Center for Creative Leadership shows that leaders who communicate with empathy and transparency achieve 60% higher levels of team engagement and motivation.
In cases where cost-saving measures are inevitable, the right framing and tone make a significant difference, minimising resistance and preserving morale.
5. Prioritise Talent and Cultural Stewards as Assets
Retaining and empowering top talent, particularly those who are “cultural stewards“, who understand and embody the company’s culture, is essential for maintaining long-term value. McKinsey have suggested that top management turnover in poorly integrated acquisitions can reach up to 40%, which inevitably impacts performance and stability.
PE firms that foster inclusive integration strategies and retain key cultural stewards see stronger, more sustainable performance outcomes, helping ensure the longevity and success of the acquisition.
Incorporating Leadership Strategies into Private Equity: The Path Forward
With these principles in mind, PE firms can better equip themselves to navigate the challenges that arise during acquisitions. As the case study illustrates, rigid approaches focused on cost savings alone will lead to strained relationships, eroded morale, and loss of talent.
But by taking an alternative approach – fostering alignment on shared values, embedding integration expertise, using data insights, and adopting empathetic communication – firms build resilient partnerships and create enduring value.
In fact, the role of culture in PE has gained such prominence that nearly half of all PE firms now assess cultural alignment as part of their due diligence process, according to a recent survey by PwC.
If it didn’t matter in the past, it certainly matters now and underscores the realisation that culture is a central pillar of acquisition success.
Conclusion: Culture and Behavioural Strategies in Private Equity
The dynamics between leadership behaviour, culture, and integration have become increasingly relevant in determining the success of PE-backed firms. As demonstrated in Peter’s story, cultural sensitivity, empathetic communication, and proactive alignment with company values are essential elements that should not be neglected in favour of financial outcomes alone.
When these elements are properly managed, PE firms can avoid the common pitfalls of failed integrations and increase the odds of a successful, sustainable partnership.
In today’s market, where competition and customer expectations are evolving, the PE firms that prioritise culture and behavioural strategy alongside financial metrics are positioned to capture the most value. By respecting the complex relationship between leadership, culture, and strategy, Private Equity can drive not only immediate returns but also long-term growth that benefits both the firm and its stakeholders.
If what we are talking about resonates, let’s start a conversation.
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