In private, talent operating partners are frustrated with investment teams' lack of understanding about organisations. Likewise, investment managers are frustrated they can’t find the right executive talent quickly.

Frictions have spiked as economic headwinds have increased pressure to deliver operational improvements. These tensions are inevitable with the ‘third wave’ in private equity, as the focus shifts from leverage and simple operational improvements to complex organisational drivers of value growth.

Mutual understanding is key. The first step: understanding the root cause of the friction between deal and talent operating teams. Dealmakers are conditioned to analyse financially relevant hard facts including revenues, costs and profit – making assumptions about these factors that are modelled in a discounted cashflow estimate of value. Although markets can achieve breakout growth, modelling financial performance is simple.

Cost-volume-profit models are inherently “linear” approximations, with fixed and variable costs driving profits based on sales volume. There are only a few variables. The performance of organisational systems and people, however, is not linear.

The collective ability to make and execute the right decisions enables the realisation of value creation. However, this process can be impaired by subtle organisational derailers that are impossible for the board or senior management to pinpoint.

There are a vast number of diverse enabling/ disabling factors. And organisations are only as good as their weakest link. So, a missing vision, poor CEO communications, micro-management in a key function, a lack of a CRM, etc, can cripple organisational performance and delay plan implementation.

The relationship between organisation derailers and performance is anything but linear. We rely on CEOs and leadership teams to manage their organisational systems, and identify and improve the weakest links. So it’s logical that when implementation starts to wobble, new managers are brought in.

But this is often “throwing the baby out with the bath water”. New management may not bring the competencies to resolve specific bottlenecks. And there is always a delay and loss of knowledge when making a management change.

It’s far less risky and faster to pinpoint the specific derailers and help the existing management to resolve them. Embracing organisational effectiveness as a value driver has great potential for private equity.

However, realising it will demand greater mutual understanding between deal teams and talent operating partners. Deal partners need to learn that organisational systems are more complex than financial models and a checklist. And talent operating partners have to learn how to empirically connect diverse organisational performance drivers to valuation models.