Introduction

Over 10 years, through 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 of those observations. Trading teams need to think critically about four behavioral enemies of value creation that challenge both investment professionals and C-level managers of their portfolio companies. We call them The Four Horsemen of the Private Equity Apocalypse.

Delay

The human condition is peppered with preferences and avoidances. Cast teams are no different. The sizzle is in the next transaction. Comparatively, the operational side of investing is boring. However, the execution vindicates the inversion thesis. Furthermore, small, neglected problems can turn into large-scale crises.

Assuming that the dashboard metrics have a practical mix of leading and lagging metrics, that is, input, process, and output metrics, questions should be routinely asked about the underlying root causes of variance against 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 the execution that one knows should occur, denial is the inability or refusal to see the obvious need for action. For example, whoever delays in writing his will is a procrastinator. He who avoids the wisdom of a will is in denial.

Denial adopts irrational conclusions about the negative variation of the board metric. Namely, “This can’t be right (because we just renegotiated bank agreements)! Root cause(s)? Maybe the forecasting assumptions were faulty, the tracking metrics aren’t aligned, or both. The area most A common denial I witness in my private equity consulting practice concerns portfolio company leadership teams.

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 proselytized followers. Followers don’t commit until they internalize the WIIFM: “What’s in it for me?” In deference to this new reality, leadership styles have changed dramatically over time. This means abandoning command and control dictates 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 achievement and self-actualization aspirations has different definitions. A recent customer experience sums up the point. The managing director raged, “Don’t the (portfolio company’s) leadership team understand that they should be grateful to have a job in this economy?” Since the United States has enjoyed a basically robust economy from 1983 to 2008 (despite mild recessions that followed Desert Storm and the dot-com bubble), millions of employees have a skewed view of “tough times.” .

The image is complicated. Interspersed between employees and bargaining teams are C-levels. These C-levels may have problems with the negotiating team’s directives. Because? Some members of the negotiating team lack managerial experience that translates into credibility points with 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 manifestation of centralized decision-making power, hoarding is related to execution. A main symptom of hoarding is “around”. Translation: I’ll take care of 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 portfolio company, or to an outsourced provider. Hoarding is not a sign of strength. Hoarding can be seen as a sign of insecurity. In addition, hoarding can limit upward career mobility. A wise mentor once quipped, “If you can’t be replaced, you can’t be promoted.”

Effective leaders delegate. They also respect supporters who push to clarify priorities and the corresponding enforcement implications. Successful leaders design efficiently executed deliverables. 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 time consuming. Sometimes the skill involves knowing when to defer to a colleague or when to outsource to the vendors of the stuff. The drivers of the decision are speed, costs and benefits, that is, the IRR on value added. In fact, relationship-minded providers could tackle the problem and steer both investment professionals and portfolio company C-levels toward knowledge transfer. The creation of value hangs in the balance of the decision.