Introduction
Over 10 years, across 24 private equity backers, for 100 portfolio companies and the last 300 deliverables, certain patterns emerge. Let’s call this an 80-20 observation. This article addresses one such observation. Trading teams need to think critically about four behavioral enemies of value creation that challenge both investment professionals and the C-level managers of their portfolio companies. We call them The Four Horsemen of the Private Equity Apocalypse.
Delay
The human condition is dotted with preferences and avoidances. Delivery teams are no different. The sizzle is in the next transaction. Comparatively, the operational side of investing is boring. However, the execution vindicates the investment thesis. Furthermore, small, neglected problems can turn into large-scale crises.
Assuming the dashboard metrics have a practical mix of leading and lagging metrics, i.e. input, process and output metrics, questions should be routinely asked about the underlying root causes of variance from expectations. Like a medical diagnosis, early detection and treatment ensure good fiscal health. The points are simple. First, measure and analyze the “right things.” Second, react quickly to the variance to see if it is a setback or a developing trend.
Denial
Denial refers to self-deception through cognitive dissonance, that is, filtering out stimuli contrary to the existing paradigm of “reality.” What is the difference between denial and procrastination? They are first cousins. While procrastination refers to delaying execution that one knows should occur, denial is the inability or refusal to see the obvious need for action. For example, someone who takes a long time to write their will is a procrastinator. He who avoids the wisdom of a will is in denial.
The negation adopts irrational conclusions about the negative variation of the board metric. Namely, “This can’t be right (because we just renegotiated bank covenants)! Root cause(s)? Perhaps the forecast assumptions were faulty, the tracking metrics are out of alignment, or both.” The most common area of denial I see in my private equity consulting practice concerns portfolio company leadership teams, which, in the vernacular of Jim Collins, means the right people, with the right skills. , in the right places, at the right time.
Private equity transactions often impose new responsibilities on the C-levels of the portfolio company. In the absence of the aptitude and attitude to learn, the right decision is a fait accompli because these C-level professionals are not sufficiently equipped to execute the responsibilities of their roles in relation to the investment thesis. Great leaders chronically struggle with difficult personal decisions. In making the decision, most regret their denial that resulted in a value-destroying procrastination.
Alpha Dog Behavior
“Alpha dog behavior” is another way of saying “control.” For starters, “control” is illusory. Leaders only achieve great performance through proselytizing followers. Followers don’t commit until they internalize WIIFM: “What’s in it for me?” In deference to this new reality, leadership styles have changed dramatically over time. This means abandoning dictates of command and control in favor of more inclusive and collaborative styles.
The evolution of leadership style is a generational phenomenon. Millennials have a different “flight or fight” DNA than baby boomers. The millennial version of Maslow’s hierarchical aspirations for fulfillment and self-actualization have different definitions. A recent customer experience sums up the point. The managing director fumed: “Doesn’t the (portfolio company’s) leadership team understand that they should be grateful to have a job in this economy?” Given that the United States has enjoyed a basically robust economy from 1983 to 2008 (despite mild recessions following Desert Storm and the dot-com bubble), millions of employees have a skewed view of “hard times.” .
The image is complicated. Sandwiched between the employees and the negotiation teams are the C-levels. These C levels may have problems with the negotiating team’s directives. Why? Some members of the negotiation team lack managerial experience that translates into credibility points with the C levels. The recessionary dynamics exacerbate the phenomenon.
Hoarding
Hoarding is the antithesis of delegation. What is the difference between accumulate and control? Actually, they are also first cousins. However, while control is a power manifestation of centralized decision-making, hoarding is related to execution. A main symptom of hoarding is “around”. Translation: I’ll deal with it (eventually). Two counterpoints are offered. First, even Superman is vulnerable to kryptonite. Second, there are only 24 hours in a day; therefore, bandwidth is a finite good.
The solution is to prioritize and delegate to the lowest level of functional competence. This can be within the company, within the holding company or to an outsourced provider. Hoarding is not a sign of strength. Hoarding can be seen as a sign of insecurity. Additionally, hoarding can limit upward career mobility. A wise mentor once joked, “If you can’t be replaced, you can’t be promoted.”
Effective leaders delegate. They also respect supporters who push to clarify priorities and corresponding execution implications. Successful leaders design deliverables executed efficiently. Superior leaders do not burn their subordinates.
Summary
Many seasoned veterans find that the more they learn, the more they realize how little they really know. The “I don’t know” epiphany can be a healthy step toward value creation. The litmus test for leadership is what these professionals choose to do when faced with the unknown. Choosing to master new skills is laudable, but it takes a lot of time. Sometimes the skill involves knowing when to defer to a colleague or when to outsource to subject matter providers. The drivers of the decision are speed, costs and benefits, that is, the IRR over value added. In fact, relationship-minded vendors could address the issue and guide both investment professionals and portfolio company C-tiers toward knowledge transfer. The creation of value depends on the balance of the decision.