Team Dynamics in a Private Equity Firms

I wrote a post recently called the aftershock of hard negotiations. The general premise being, if you must live with vendors in the future (as part owners), then it’s wise to think of your future relationship when negotiating. (Even if you don’t live with them, you should still be decent, but that’s not nearly as convincing.)

So, with that in mind, I want to comment on negotiations again, but in the context of your internal private equity firm’s team dynamics. There are a few points to consider here:

Team members are acutely aware of your negotiation tactics (and most tactics in general), so when you try to use them internally, it leads to instant contempt
Your negotiation style becomes a part of you when you’re dealing with potential investees all day, so it’s not always easy to turn it off when dealing with your team dynamics
You are married to your team dynamics; you aren’t selling them a set of encyclopedias; so, even though you may have superior negotiation skills, your team will be there tomorrow to resent you if you treat them unfairly
Your team talks; there are cliques you can’t even see; don’t treat anyone in a way you wouldn’t want everyone else to know about
In deals and in life, you often benefit much more from not getting your way

Too often we focus on the tangible and don’t acknowledge the potential value in maintaining good relations. Just food for thought for now.

Human Side of private equity firms

Dealmaking may seem to be all financial figures and legal terms, but ask any experienced dealmaker what the most common cause of failure is and they’ll generally point to people issues. Admittedly, many of these are vendor versus investor issues, but behind the opaque cloak of private equity firms, you’ll also find many failures attributed to intra-team dynamics issues.

I’ve found three common intra-team issues that can lead to deal failure:

Deal Envy - it’s not so much the envy that damages the deal, but the actions that result. Excessive negativity (as a result of envy) can wear down even the most enthusiastic private equiteer. So, it helps to give your team buy-in as early as possible: share the idea, ask others to become involved, and try to lead with an open mind. As soon as you appear evangelical, your team will likely position themselves to shut you down.
Deal Disputes – the best way around disputes is to prevent them in the first place. Ensure your arguments are fact-based and keep an open mind. If you appear to have made your mind up without sufficient evidence, your team will likely position themselves to prove you wrong. Also, try not to implicate your team or their actions in your reasoning. People are naturally defensive. So, try not to put them in that position in the first place.
Deal Fatigue - even a deal evangelist suffers from deal fatigue if a deal subsists long enough. But, deal critics suffer from fatigue much sooner, so it’s important to keep a deal moving if you plan to garner support from the private equity firms team dynamics. Make sure you respond and gather supporting evidence quickly and meet with your team regularly and consistently. A quick deal has many other benefits, but mostly it reduces fatigue.

In summary, there are a few measures you should always take to prevent the above issues: facilitate buy-in to reduce envy, keep an open mind to prevent disputes and maintain momentum to close the deal before fatigue sets in. Of course, the investment has to have merit in the first place, but if you keep one eye on intra-team issues, at least your deals won’t fail for a lack of leadership and skill.

Team Dynamics when Discussing Deals

From what I’ve seen, there are two ways that team dynamics teams can discuss, debate, contemplate and decide on deals:

All-in discussion
The defensive lead

The all-in method involves everyone contributing to the pros and cons, strengths and weaknesses, opportunities and threats, of the potential investee. It gives everyone a bit of buy-in, which is great, but it also abdicates anyone of sole responsibility, which can be bad.

The defensive lead method involves one person taking the lead on a deal and becoming its champion. He/she must understand the intricate details of the business and defend it as other team members barrage him/her with its perceived shortcomings.

Certain people swear by the defensive lead method because it unleashes emotion and creates a deeper understanding of the business.

My preference is certainly the all-in method. I find it to be the most respectful, the most constructive and the most enjoyable. I find that the defensive lead method creates unnecessary rivalry and tension. The discussions largely become divisive as they focus solely on negatives. As the name suggests, the team dynamics perceives the lead person as being defensive and the lead person perceives the team dynamics as being argumentative and adversarial.

I’d be interested to know what others think, especially since the defensive lead method is most prominent in the private equity industry. It’s probably a hand-down from the competitive world of investment banking and/or strategic consulting. I like that we don’t work their long hours, and I’d like to think we have the intelligence not to waste energy on unnecessary internal competition.