Many private equity firms don’t survive the loss of the firm’s leadership. Building your team is crucial if you want your firm to continue to flourish when you are ready personally to ease up. Even with you still there, savvy investors understand how important smooth functioning teams are to the performance of a fund and the long-term performance of a firm. Consequently, you need a team behind you, and eventually instead of you. And you need your firm and its investors to understand and have confidence in your team development approach.
Importance of building a team
Leaders of many private equity firms have two goals after their initial success: to have continued economic success and to create an organisation that will survive after they retire. To achieve these goals, they need a team of professionals who can understand the details of deals, and act strategically, decisively and effectively on their own (without the founders’ input). In addition, firm leaders need to hire individuals who can lead. To attract this talent, firms must provide an environment where people can be successful and have room to grow into leaders.
Firms can tap a mix of sources to build their teams: some future partners will join the firm as mid-career professionals (e.g., Vice Presidents, Managing Directors, or Partners) and some future partners will join the firm as associates after some initial experience at an investment bank or consulting firm.
The advantages and challenges of bringing in people at mid-career
Advantages: They know what they are getting into, generally. They bring different experiences and ways of working to your organisation (and some of these different ways might be good to adopt or adapt).
Disadvantages: They already have a way of working, and might resist your methods. It’s hard to get the people you want; those committed to private equity and doing very well at their present firms will often not want to move, except for very compelling economics. Ones more open to moving, especially at a reasonable price, might not be doing very well where they are.
The advantages and challenges of “growing your own”
Growing your own means bringing people in early in their careers and getting them to learn what they need to know, and to develop, on your team. The challenge is to find the right (usually) young people, among all of those available, and at the same time making your firm attractive to them.
In private equity’s recruiting pools, e.g., the people with 1–2 years of investment banking or consulting experience, many people are still crafting their identity. They may be very insecure about their achievements, and can often be easily motivated (as they may be by their current employers) by the opportunity to get the highest grade, or the biggest bonus. They will do or overdo what they are asked to do. But they may not think much about whether something is worth doing. They may not be able to guide themselves or foster the development of others. They may well not survive in private equity beyond the senior associate role.
Others are actually in fact young grown-ups, or well on the path to becoming grown-ups with goods odds of maturing quickly. They are not just looking for the next hoop to jump through. Rather, they know what they want in their career, and know what they are looking for in a firm and in colleagues. They are looking for the place to build their career and they have the emotional disposition to be a firm leader.
Picking associates and having associates pick you
If you are looking for young grown-ups, what should you look for? Investment banks and consulting firms have screened for you, eliminating those who lack ambition, achievement orientation, and basic skills for succeeding in an associate role in those firms. The main job of your interview is to differentiate candidates who will not survive in private equity beyond senior associate from those who will.
Interviewing candidates for Associate
What you are really going for is to find high integrity individuals whose interest in private equity derives from genuine interest in understanding how businesses grow, who want to grow and be continuously challenged professionally, to be part of a team, and to work with individuals as smart or smarter than they.
All this is true regardless of gender. Some nuances are influenced by gender, and that’s an issue I’ll talk about in another newsletter.
As part of your evaluation of a candidate, you can also predict whether the candidate will likely be able to manage both the intellectual demands of the current position, and the intellectual demands of future positions in future years. You can do this with an inexpensive, sophisticated cognitive ability test.
Having associates pick you
Future leaders will be more attracted to some firms than others. The culture and integrity of the place and having a differentiated model for achieving returns will make your firm stand out. Being regarded as a firm where talented young professionals can feel there is room to grow up and are excited about learning from their peers and superiors is important. Having a culture where junior talent is cultivated, where people get quick feedback on the quality of their work and the problems their immediate superiors and superiors once removed anticipate in their career development is important.
Even how you recruit affects who you get to see and what other candidates think about you versus the competition.
One firm put out an announcement to members of the Yale Sailing Team — searching for a summer intern at a private equity firm. The applicant selected was a two-time inter-collegiate All-American sailor majoring in Economics and Statistics. She is getting great exposure to a firm that had the forethought to recruit from a school, major, and sport that breeds smart resourceful, competitive, team players.
What to do
- Know what you are looking for when you do your interviews and be systematic about pursuing your objective.
- Develop the culture that will attract the talent that you want even if that requires some adjustment to what you have.
In future posts, we’ll discuss developing and retaining the people you have and issues in lateral hires.
Originally published in The European Financial Review
About the Author
Leslie S. Pratch is the founder and CEO of Pratch & Company. A clinical psychologist and MBA, she advises private equity investors, management committees and Boards of Directors of public and privately held companies whether the executives being considered to lead companies possess the psychological resources and personality strengths needed to succeed. In her recently published book, Looks Good on Paper? (Columbia University Press, 2014), she shares insights from more than twenty years of executive evaluations and offers an empirically based approach to identify executives who will be effective within organisations — and to flag those who will ultimately very likely fail — by evaluating aspects of personality and character that are hidden beneath the surface.