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Role of strong leaders in the private equity industry’s success

(Image credit: Image Credit: Rawpixel / Pixabay)

Looking back to the Private Equity (PE) industry post the great recession period, they are using resources and influences for long-term prosperity. PE firms are executing operational agendas through technological ways by using Machine Learning, Robotics, Automation, Artificial Intelligence, and many more. Operational excellence is more pronounced with top PE players having EBDITA growth, external advisors, operating partners, potential plans, novel investment formats, and standard procedures.

Here is a quick rundown of significant facts regarding private equity.

  • Brookfield invested nearly $6.28 billion and emerged as the largest private capital investor in India.
  • More than 100,000 investment and management professionals are active worldwide.
  • ~46,20,00,000 search for the term Private equity in Google search results.
  • Total employees reach up to ~ 20 million at PE-backed companies across the globe.
  • There are ~ 16,000 PE firm offices and ~40,000 PE-backed companies across the world.
  • ~16 per cent of the top three MBA students find PE as their best exit opportunity. Private equity career opportunities are booming.

General partners have raised and raising capital known as ‘dry powder’ to deploy in the next downturn, in case, it happens. The tech-focused dry powder has reached $1 trillion in 2018.

As a $4 trillion industry, PE has a stronghold in the finance market.

PE might operate at the centre of multiple financial and commercial ecosystems in scale and scope in the upcoming years. Technology and intelligent offense have made PE an exciting industry with stronger deals and high liquidity. In a nutshell, the PE industry has captured the market positively and has all signs of growth in the future too.

However, what worked in the past may not work in the future too. Going forward, the firms require to transform the core of their business and operating models for continued growth and success. Though its superior performance has not yet seen a competition, winning the future requires continuous preparation.

Diverse teams outperform homogeneous ones in innovation, performance, or problem-solving techniques. Still, the urge to promote people who are similar to us remains strong and is continuing. Many PR firms exhibit insular thinking, diminished problem-solving capabilities, and poorer investment decisions. This seems to be a major hurdle in the path of success. Leaders who want to win should rethink their ways of strategy, deal closures, management facilities, and look forward to new agendas.

Let us see what and how new and existing leaders can contribute to PE professionals and industry as well.

Leadership agenda in private equity

PE firms must pull in multiple transformations in their organisation and their portfolio companies as well. They need to gain more converts, attract and retain prospects into the private equity career. Henceforth, leaders are forced to survive and lead in ambiguous, fast-changing and challenging environments.

The next decade in private equity looks promising with more deal flows and capitals. All said PE leaders play a significant role to support private equity transactions. A leader, in reality, is a collaborator, energiser, pilot, provider, harmoniser, forecaster, producer, and composer.

Let us see how to channelize the leadership style for PE firms’ continued success.

Creation of differentiated go-to-market strategy

In the coming years, the competition will increase. PE firms may face pressure for higher deals while increasing returns. SoftBank-mega funds, Carlyle and Blackstone – shifting capital, pension funds, and sovereign wealth are enlarging the gap between the large players and its smaller counterparts. There occurs stratification in the strategies and dealings. At this juncture, smaller firms are forced to exhibit specialisation to be the differentiators for a commendable market position.

PE leaders must develop a healthy and competent go-to-market strategy with an emphasis on diversification across industries, geographies, and asset classes through assessment of market position and protect growth.

Be aware of blind spots

It is undeniably agreed that all leadership styles contain blind spots. For instance, while forecasting, one may tend to get prejudiced with their thinking and make slow or wrong decisions in unfamiliar circumstances. Such fixation may lead to a hard time influencing people for making decisions.

PE leaders must understand their blind spots and make emotional connections to inspire businesses. A survey report suggests that PE leaders with soft skills are preferred. Respondents looked for passion, energy, and emotional intelligence as desired traits in their leaders.

PE leaders must treat meetings as an opportunity to learn, understand their blind spot, and provide space for others.

Embracing and harnessing the power of diversity

Leadership style is situational and is subject to change. A true leader embraces the change and harnesses the power of diversity. However, many leaders tend to follow the default style or the ones in which they are comfortable. It is a ‘big no-no’ in private equity.

PE firm’s leadership team must embrace thought diversity, recognise and expand engagement. Cookie-cutter leadership might lead to weak decisions. A range of leadership styles and experiences are needed to address the evolving changes in the PE industry.

PE leaders must embrace a range of leadership styles, increase the quality of communication, address the changing environment efficiently, overcome and master new market challenges, maximise the firm’s value, and get positioned better in the market.

Leadership dynamics

Connecting investors, CEO, and CFO - a three-way leadership dynamics is what a PE firm needs. A PE firm must accommodate these dynamics to explore potential and revenue opportunities. PE leaders must recognise the major misalignments related to the role, acknowledge the disconnect between behaviours in assessment and prospects. PE leaders must build alignment with a clear definition of roles and expectations. Trust, open communication, and understanding is the need of the hour.

PE leaders must proactively manage the triangular relationship between sponsors, portfolio company’s CEOs and CFOs. Investment success is all about people and people management.

Codifying best practices for the firm’s future

PE leaders must involve in evolving organisational practices and structures for a bright future. The integration of cross-deal teams is essential for overall success. The leaders must thrive to make the practices flatter, collaborative, and more diverse.

PE leaders must capture the growth opportunities by establishing best practices that encourage collaboration and design processes, manage the tension of holding periods, and create value for the firm. Leaders must design knowledge-sharing processes that are robust and can get applied at scale.

Implementing digital transformation at scale

Digital competencies play a significant role in value creation. PE firms are forced to implement new capabilities that enable targets to achieve competitive cost performance and tune-up their strategies. PE leaders must tap new technology advances like natural processing language, process automation, and other innovative methodologies to reach new heights in business.

PE leaders must indulge in digitising the right products and services, data and analytics, and implement supporting technologies. Change management is the next future and defining characteristics of outperformers.

PE leaders must recognise high-value opportunities, help portfolio companies with neat digital strategy, push the transformation process, and boost net incremental values.

Optimising social and business value

PE firms are compelled to demonstrate social, environmental, and governance (ESG) frameworks. To demonstrate credibility, PE leaders must incorporate ESG metrics for their investment methodologies. As scrutiny grows, PE leaders must demonstrate the financial value created by the ESG approach.

PE leaders must influence acquisition and post-acquisition approach by embedding ESG metrics throughout the investment life cycle, and embrace the role of holistic value creators.

Implementing cybersecurity measures to gain trust

PE firms face sophisticated and pervasive internal and external attacks. It is critical to safeguard the firm and portfolio companies. Portfolio companies may have compromised structure, as compared to the parental firm. Many PE firms outsource operational work. All these have led to major cyber-risks leading to data breach of clients and businesses.

PE leaders must promote to implement a dual strategy for a firm’s and investor’s assets, conduct an evaluation, embed a deep level of security, create awareness among the people in the firm, implement social media policies, and protect from targets.

PE leaders must mitigate the growing cyber-risks. PE leaders must make efforts to protect consumer data, trade secrets, and critical assets of the firm and its portfolio companies.

Wrapping up

Having said all these things, one thing is very clear- Private equity has the potential to occupy a powerful position in the financial market by 2030. 2020 is just the beginning of the new decade.

PE firms must catch up with leaders who can bring change.

Attractive opportunities will go to firms that have strong leaders. It is an undeniable act that the rising market will not benefit all the PE firms. PE firms have to work differently under strong leadership to deliver strong returns while becoming one of the best outperformers.

Leaders have to think, plan, and invest in novel ways. They must have a strong commitment to meet the internal and portfolio company’s needs amidst the economic, geopolitical and market uncertainty. An efficient leader can walk out with flying colours amidst fast growth and fierce competition. It is time for the PE firms to walk through the buyers’ market under strong leadership activities.

We believe success will come to the firms that follow the aforementioned actions without delay.

Ariaa Reeds, Writer, USPEC