How Important is Private Equity in Human Capital and Talent Management?

Over the past few years, we’ve seen new and traditional private equity firms slowly gain interest in the HR technology space.  Private equity investment isn’t actually new to the HR vendor market.  General Atlantic Partners has been one firm that has take interest in HR over the years. 

Private Equity & HR Technology

More recently, a few notable private equity firms have made acquisitions in the HR technology space including:

2007  – Kronos acquired by Hellman & Friedman

2008 – Authoria acquired by Bedford Partners

2009 – SumTotal acquired by Vista Equity Partners

I am no financial expert so I’m not going to pretend to know or even describe the complexities of the investment model.  Below is a simplified view of how private equity works.

  Source: Wikipedia

What I do know though is that when private equity  firms take full control of a vendor, it is not without purpose – whether its restructuring the company, a buyout in attempt to preserve revenue and margin, or a complete reorganization to maximize the assets and value.

Why Should Customers Care About Private Equity Acquisition of their HR Vendor?

First, because it often changes the vendor very quickly and can have immediate, impacting results.  In nearly every instances, the vendors focus  is placed more on financial performance than product enhancement and innovation.  In addition, and more importantly, the private equity firms are making an acquisition because they anticipate a larger return on the investment.  As a result, return on investment requires an exit event which means the firm must sell the company either to another company or via an IPO.  It is important to note that private equity investors are not typically long-term investors and often seek to achieve their return objectives within 4 years.

In the case of Kronos, the changes weren’t necessarily significant, but it has allowed them to reorganize the company.  I wouldn’t be surprised if the company attempted to go public again (they were a publicly-traded company before H&F acquired them and took them private).  Conversely, Authoria’s investors, Bedford Partners, quickly sacked the management team and have seemed to lose a lot of momentum in process.  Right now, much speculation is circling around SumTotal as their private equity investors have stated their focus to preserve existing the maintenance stream (my words not theirs) and loo to increase margins.   Just last week, and immediately following their merger completion, SumTotal let go of their CEO in favor of solely a new president. 

Is Private Equity Good for HR Technology Vendors?

The easy answer is that it varies.  I have concluded that private equity acquisition is only good in the HR technology market where:

1. The vendor is highly mature and profitable
2. The market is well-defined and has little fragmentation
3. The market is highly mature and well beyond an early adoption or early majority stage (see below)
4. The vendor faces few competitive threats

Source: Knowledge Infusion, 2009

In my opinion, private equity acquisitions in talent management is very risky today because the market is still relatively immature, very fragmented, and littered with lots of competition.

What do you think?  Is private equity investment in HR technology a good thing or bad thing?