Striking the right balance in private equity leadership

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1 P R I VAT E EQUI T Y P R AC TI CE Striking the right balance in private equity leadership A survey finds that two leadership styles dominate the industry in Europe, suggesting that many PE firms are at higher risk of insular thinking, and potentially, poorer investment decisions.

2 In problem solving, innovation, and financial performance, diverse teams have been proven to outperform homogenous ones. 1 Yet the bias (conscious or unconscious) that nudges leaders to hire and promote people just like us remains strong. Our study of European private equity (PE) professionals finds that senior industry leaders cluster around just two leadership styles out of a possible eight that Heidrick & Struggles identified in our proprietary assessment tool. This research suggests that, compared with more diverse leadership teams, many PE firms are at higher risk of insular thinking, diminished problem-solving abilities, and ultimately, poorer investment decisions. These are among the findings of a survey of 51 managing partners, partners, and principals of European private equity firms who completed an online leadership assessment. The survey, part of an ongoing research project, 2 ascertains a leader s primary leadership style as well as his or her access to eight styles we have identified: 1. Collaborator: Develops others, team-building, empathetic, attracts talent 2. Energizer: Charismatic, inspiring, connects emotionally, provides meaning 3. Pilot: Strategic vision, manages complexity, team-building, clear POV 4. Provider: Intellectually confident, operates with conviction, driven to provide for others 5. Harmonizer: Creates positive and stable environments, reliable, diligent 6. Forecaster: Has deep and broad knowledge, conceptual thinker, anticipatory 7. Producer: Execution- and task-focused, linear thinker, structured, loyal to tradition 8. Composer: Independent, creative, problem solver, decisive, self-reliant The survey found that two-thirds of European private equity leaders have either Forecaster or Pilot as their predominant leadership style. The prevalence 1 Katherine W. Phillips, How diversity makes us smarter, Scientific American, October 1, 2014, scientificamerican.com. 2 Our psychometric survey examines three important aspects of leadership: a thriving mind-set; a leader s combination of self, social, and situational awareness; and essential leadership values such as ethical integrity and openness to change. Our statistical analysis of more than 1,000 of these assessments identified the eight leadership styles discussed in this article. For more about the research, see Karen Rosa West, What s your leadership signature?, December 12, 2015, on heidrick.com. 2 Striking the right balance in private equity leadership

3 of the former style is perhaps unsurprising, as Forecasters tend to be deeply knowledgeable in their particular area of expertise, adept at critical analysis, and often excel at anticipatory thinking. Indeed, most private equity professionals started in banking or consulting and are equipped with skills in analytics and finance, progressing along similar career paths in what has grown into an established industry. It s easy, therefore, to imagine that Forecasters would rise to the top of private equity firms, as in many ways their leadership style fits the work. Forecasters love gathering data and deepening their expertise, tend to be happiest when they can synthesize observations, and are typically adept at harnessing their skills to foresee events and trends. Colleagues view them as knowledgeable and farsighted. trust their gut more than the numbers when making decisions. Yet Forecasters working in private equity encounter that trait with regularity in the form of early-stage entrepreneurs, founder-owners, and family businesses. Such a fixation on data could lead Forecasters to rely too much on financial engineering to realize returns, potentially stifling a portfolio company s innovation. And the priority they place on intellectual reasoning can crowd out the emotional connections that leaders of other styles may require for inspiration. This is an important point as many of our survey respondents stated they wanted more PE leaders with soft skills, citing inspiration, imagination, passion, energy, and emotional intelligence as desired traits. Similarly, Pilots are understandably common in European private equity, given that they tend to thrive in ambiguous, complex, fast-changing, and challenging environments. Pilots also tend to be forward-looking, capable of generating compelling strategies and translating strategy into action. Because they have clear opinions and relish challenges, they exhibit an intensity that many colleagues admire, but that some may find draining. Beware the blind spots All leadership styles contain blind spots, not just strengths. Could these styles therefore be holding back the private equity industry as much as they help define it? Forecasters, for example, tend to become overly wedded to their own thinking, and can be slow to make decisions in unfamiliar circumstances, as their predilection is to continue gathering data to feel more informed. Forecasters may also often have a hard time influencing or gaining buy-in from people who Pilots, too, have their blind spots. Their strongly held views can dominate the room and leave little space for others to freely share their thoughts and insights, thus having a stifling effect on creativity and encouraging groupthink or false consensus. Pilots may conduct meetings as if the right decisions have already been made or are obvious rather than treating meetings as opportunities for learning. Moreover, Pilots often have difficulty stepping back and letting others lead. A missing skill In addition to analyzing the most prevalent leadership styles among European PE leaders, we also determined which styles were rarest, as these represent opportunities for firms to add, or further develop, particular leadership strengths. Notably, the least prevalent style was that of the Energizer, a style characterized by the ability to build enthusiasm and inspire buy-in and engagement in others. Energizers tend to help others to see the meaning in the task at hand a valuable skill that our research Heidrick & Struggles 3

4 suggests is relatively rare among the organizations we studied. The roots of this finding may stem from the industry s historical tendency to be an up-orout environment with a hard-nosed approach to doing business. Regardless of the reason, PE firms that lack the cooperation and people-first focus Energizers bring could be at a disadvantage in times of rapid growth or disruptive change environments in which Energizers thrive. Similarly, Energizers bring an abiding optimism to their interactions, a valuable leadership trait in any business climate. Harnessing the power of diversity It s important to note that a leader s style is not fixed: leadership is situational and evolves with time and experience. Moreover, leaders are likely to have some level of ability in all the styles to varying degrees. Nonetheless, most leaders tend to continue using a default style or a small set of styles that they find most comfortable. While an individual PE firm s leadership team may have access to a wider range of styles than our findings would suggest, on balance, PE firms in Europe can find it difficult to ensure that all traits are represented. The leadership team should always have relevant content expertise, but recognizing and expanding upon the value of engagement, team performance, and thought diversity can often lead to better firm performance. decreases and critical questions go unaddressed by the collective intelligence of the group. After all, investment committee members serve crucial roles in debating decisions and assessing risk. Without a range of leadership styles and experiences to draw from, committees could miss the chance to realistically appraise various courses of action or identify them in the first place. Ultimately, private equity firms should ask themselves if the leadership styles in their investment committee (and broader organization) is a strength or vulnerability. Against a market backdrop of high-entry pricing and low growth across Europe, sponsors need to identify opportunities that create value in portfolio companies or even venture into new business territory. Post-acquisition, a PE firm s leadership style rarely determines the development of a 100-day plan but perhaps it should be taken into account in order to overcome market headwinds and maximize value. Private equity firms that embrace more diverse ideas and approaches are better positioned to master new challenges and, ultimately, drive value creation. About the authors Tom Thackeray (tthackeray@heidrick.com) is an associate principal in Heidrick & Struggles London office and a member of the Private Equity Practice. Richard Thackray is an alumnus of Heidrick & Struggles London office. A version of this article previously appeared in the November 2016 issue of Financier Worldwide. The most troubling risk facing private equity firms with cookie-cutter leadership teams is that a lack of diverse viewpoints could lead to weaker investment decisions. When a limited number of leadership styles dominate, the quality of communication 4 Striking the right balance in private equity leadership

5 Private Equity Practice Heidrick & Struggles global Private Equity Practice combines a deep understanding of private equity markets with world-class expertise across all major industries and functions to provide a broad range of value-adding services. We pride ourselves on finding top private equity management talent by recruiting investment professionals, operating partners, and other essential senior managers who support financial growth. Additionally, we work with private equity backed portfolio companies to bring innovative services designed to meet today s challenges while securing the leadership needed to deliver on tomorrow s strategies. Our expertise includes due-diligence support, pre- and post-acquisition executive search, leadership assessment, proactive introductions, and the construction of advisory boards for both private equity firms and their portfolio companies. With more than 80 consultants in 50 offices around the world, our team includes functional experts in areas such as technology and operations, financial officers, human resources, marketing, compliance, risk, and legal infrastructure. Our blend of search and consulting services enables us to develop long-term strategic partnerships that build winning leadership teams and create substantial value. Leaders of Heidrick & Struggles Private Equity Practice Daniel Edwards Global Practice Managing Partner dedwards@heidrick.com Todd Monti Regional Managing Partner, Americas tmonti@heidrick.com Michael Di Cicco Regional Managing Partner, Asia Pacific mdicicco@heidrick.com WE HELP OUR CLIENTS CHANGE THE WORLD, ONE LEADERSHIP TEAM AT A TIME Copyright 2017 Heidrick & Struggles International, Inc. All rights reserved. Reproduction without permission is prohibited. Trademarks and logos are copyrights of their respective owners. Cover image: IndypendenZ/iStockPhoto

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