Corona is omnipresent and is spreading relentlessly across almost all industry branches. Caution is paramount and senior managers across entire business sectors are grappling with the situation. This applies as well to private equity despite its unparalleled ability to evaluate risk. Faced with such unprecedented uncertainties, the sector has no choice, but to adapt fast. Yet, how?
From sprint to marathon
If one were to liken the private equity sector to an Olympic sport, it would undoubtedly be the sprint. Everything in the business is geared towards achieving short-term goals. Since 2009, there has been one single mantra: higher, faster, further. The focus is on acquiring and scaling promising companies, the sale of which often generates gargantuan profit. COVID-19 now presents a situation where selling is no longer a short to mid-term option and only a turnaround would necessitate growth. As a result, the crisis has taken many private equity managers by surprise, not least psychologically. Around half of them were just embarking on their careers when the financial crisis struck. At the drop of a hat, private equity managers now suddenly have to manage their portfolio companies, motivate investment teams and themselves in a completely different and new way. At the same time, they need to learn a new discipline: the marathon.
The long-term mindset
In view of the current market dynamics, many private equity funds will find it almost impossible to sell companies in the near future; instead, they will need a long-term strategy. New investments depend on substantial bank financing and stable company valuations and will therefore remain the exception for the time being. One could argue that this turns the entire private equity logic upside down. A business environment traditionally oriented towards speed and growth is undergoing massive change, for which in most cases neither portfolio companies nor private equity managers are currently prepared.
To run a marathon, one needs a clear target, specialized training and a long-term mindset. Recruiting and plain vanilla HR management will not suffice in cultivating this mindset. People, teams and organizations with a clear purpose are more capable of achieving their goals even in the face of immense stress, uncertainty and crisis. In times like these, many high potentials realize more clearly than ever what really matters to them and how to contribute to solutions that also serve a societal and personal purpose. Most private equity companies neither have the long-term mindset nor the holistic HR strategy required to master the current scenario. Added to that, monetary incentives – the key motivating factor of the original game - have also lost much of their appeal. However, a new understanding of leadership opens up interesting possibilities: those who turn their backs on fire-and-hire and move forward together can systematically shape teams, managers and corporate cultures in a manner conducive to long-term growth. At the same time, as the investment cycles of private equity firms become longer, it will be impossible to conceal or ignore conflicts. Corporate culture will then become the decisive success factor.
Finding the right motivation
The private equity industry revolves around money and KPIs – reflected in terms such as money multiples, return, management equity or carry. This will continue, and indeed it must, for the sector to play its part in our economy. That said, profits will probably be lower in the near future. Hence, empathy and purpose must be added to the mix. The dual elements of success are now money and love.
To ensure success, private equity firms and portfolio company managers need to get to grips with different KPIs and ways of working that may be new to them. This may sound easy, but in reality, it’s not. A paradigm shift of this scale can’t happen without profound personal development. This cuts right to the core, and it will take time and the necessary framework to enable it. The key principle here is: “can’t buy me love”. COVID-19 demands a new mindset plus agility − and it’s putting private equity to the test.
Redefining the new normal
Private equity managers now have a great opportunity to set new standards for sustainability and growth - particularly with abundant financial resources. In all probability, the potential for long-term growth will pay off in the post-COVID 19 world. However, this 'new normal' will not emerge overnight; it won’t happen without a fundamental mindset shift by private equity managers who have been raised to define success only along monetary lines. While personal development and cultural change are undoubtedly the first steps, this crisis also calls for a new kind of global economic order to which private equity managers can uniquely contribute to their own and societal success.
This article was published in a similar form in the German Handelsblatt. Maria Basler and Sushmitha Swaminathan: „Umbruch in der Beteiligungsbranche“, in: Handelsblatt, June 18 2020, p. 48