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Making great investments; making great investments better

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This may sound a little strange, but whenever I look around a private equity shop, including my shop, I think to myself what on Earth are we all doing? I don’t mean this in an existential sense (although that begs answering too), but more in a productive sense. We seem to spend way too much time in perfunctory meetings or way too much time analysing the past to predict the future. And, it disturbs me that this is the life of the average private equiteer.

thoughtNow, I know it’s human nature to lament our long working hours and to celebrate our stoic commitment, but let’s spare a moment to be honest with ourselves. Success in private equity is partly making good investments and partly making good investments better. Success isn’t a PowerPoint presentation, it isn’t a founder’s mistake in 1943, and it certainly isn’t a rhetorical discussion where we lionise ourselves for great work (that we haven’t really done).

If we are looking to make great investments, then we should discuss great companies, call them, visit them, sell our wares and make investments happen. If we are looking to make existing investments better, we need to visit them, understand them, distill their drivers, talk to the market, model initiatives and make improvements happen.

The problem is that most people would read those steps and exclaim that’s exactly what we do!. But, I don’t see it. I see meetings that disrupt discussions without tangible results. I see analysis that is so technical that you’d think we were exploring permutations of DNA pairs in the human genome. I see hubris attached to accoutrements, guest lists, gated estates and public appearances. I see inefficiency.

What I’d expect to see in my private equity Elysium, is a truly cooperative team, a team completely open to sharing opinions, a team with humility, thoughtfulness, self-honesty and a focus on those oh so simple objectives. A team that is so opposed to conventional wisdom that it doesn’t even know what constitutes conventional wisdom. A team that spends most of its time either in thoughtful discussion or out discovering the world, not sitting at a computer or in box-ticking meetings. In this fantasy world, my team would kick ass.

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Posted in Entrepreneur, Private Equiteers

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  • Great points David.

    In many firms, money is tied to successful exits via carried interest. I know there are large funds that can pay exorbitant salaries because their 2% management fee results in more than what's needed, but my experience is that this isn't the norm in mid-market.

    I think in addition to linking motivation to exits via carry, the carry needs to be material. I wrote a couple of posts a few months ago about calculating carry and the fact is, often founding partners leave others with too little to be motivated. If my 2 bedroom downtown apartment is going to return more in a depressed market than my expected carried interest, then it's hardly an incentive.

    Again, I realise this isn't such an issue in larger funds, but under say $200m, you see founder avarice getting in the way of incentivising staff.
  • Interesting discussion..as always.

    In my experience, the problem is not the proliferation of meetings...multiple perspectives generally create a better outcome. Rather, I believe that the problem is lack of purpose and focus. Any meeting without a single, focused objective and a discussion point outline agenda simply turns into a free-for-all led by the most dominant personalities and/or the "food-chain" positioning of the participants.

    I suggest that meetings should be about somebody needing something [helpful]from the group in order to get their responsibilities accomplished. The needy person drives the meeting and defines the agenda. Relegate the informational broadcasts (i.e., including status updates without any issues needing the group to resolve) to email and team-building to Happy Hour.

    To your question, I think that Analyst has appropriately described (in the final sentence) why PE has become what it is today (i.e., as a natural evolution of the manner in which many PE shops have been founded and staffed). But, that's not the way is has to be by definition. And, given the current economic difficulties and its impact on the investee, it is quite possible that the current state may not be the best recipe for success in the future (i.e., if not, as from now).

    But I don't think that its just the personalities or the backgrounds. Rather, I suggest that it is fundamentally the motivations and the drivers for success. Change the rules for achieving success (i.e., successful exits to which all the real money is tied) and watch how new economic realities will change the behaviors and personalities of the typical PE shop, including adventurous people.
  • Interesting observation. My first question is whether you think PE has to be this way or whether it's just what it's become? And if one could construct a team of more adventurous people, do you think that would help or hinder investment success? Thanks for the note by the way.
  • Analyst
    It sounds to me like venture capital firms operate more closely to your Elysium than private equity (though they obviously still waste a lot of time in meetings).

    I would wager it has more to do with the people than the firm's aims itself. Venture capitalists are generally a breed apart from private equiteers, even though they are both 'looking to make great investments' and 'looking to make existing investments better'. Indeed, the typical private equiteer is a conventional overperformer - top grades, top schools (Harvard MBA...etc), top experience (Goldman's or Bain), but rarely taking any wide steps away from a path that's been trodden on thousands of times before?
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