PE firms that deliver a top quartile performance in one fund often repeat the process. In fact according to Bain & Co a PE firm that excels with its first fund has a greater chance of replicating that success with the next fund. For GPs that have managed a top-quartile fund, there’s a better than 6-in-10 probability that their successor fund will also be an above-average performer.
So, if your last fund was top quartile, can you afford to be relaxed?
There’s still a greater than 3-in-10 chance that your next fund will be mediocre, or worse. You might use the same measures, processes, people and strategy as you did the first time. But there’s still no guarantee that you will pull it off.
What else can you do to be sure of success next time? To understand this, let’s take a look at what is usually regarded as the most unpredictable dimension of all, the people dimension.
These days, all valuable work carried out in organizations is done in teams. There is no place any more for the lone genius. As Bill Clinton might have said, “It’s about the team, stupid”. Sales teams need strong integration with tech support, account management, proposal writers, big deal coaches, marketing and many others in order to succeed. Innovation teams require input from all parts of the organization, not just design. Service delivery requires many different specialists to co-ordinate actions.
When we consider the portfolio company’s management team, PE firms take a lot on trust. The assumption is that if the company has done well enough to get where it’s got, then the leadership team must be good enough for the next stage. But there’s a lot riding on that assumption. Does the team really integrate and collaborate as well as it could? Markets can change and new disruptive technologies can appear. Will the team who navigated the last set of problems also be able to navigate the next set of – almost certainly different – challenges? How many of the directors are hiding that they are disengaged and demoralised? These have little loyalty to their fellows and may leave at the first opportunity. Did the company succeed partly because of luck, riding a single successful wave, but has no experience of dealing with strong competitive threats? Do they have a continuous innovation machine that can bridge from ideation to engineering and bring winning products and services to the market at the right time? Do they have the right combination of talents and intellects to cover all points of the company’s mission or are they overweight in some areas and underweight in others?
If PE doesn’t have a strong grasp of every one of these people issues, all the financial analysis in the world may be in vain.
There’s a useful parallel in business that helps to confirm the view that the people dimension is crucial to success. In the world of project management there are four key areas that need to be managed. These are:
It’s well known that at least 70% of business change projects either fail outright or deliver well short of their objectives. When project managers are surveyed and asked why a particular project ended with sub-par results, the answer 95% of the time was that it was due to failings on the people dimension. It’s relatively easy to address strategy, process and technology. But the people dimension is much harder to get right.
Management Team Analytics.
Fortunately, there’s hope. Method Teaming is the leader in a new field of analytics that looks at team capabilities. How people work and collaborate together is far more important than how people work alone. When people collaborate on any project, including routine day-to-day work, they need to blend their natural abilities with perfect synchronisation. It’s not enough to consider different skill-sets and try to connect these up. Collaboration based on skills is doomed to fail. It’s the reason why only 33% of workers in the US and 10% of workers in Europe are ‘engaged’ at work (Gallup figures). It’s vital to base collaboration on natural talents instead.
Until recently, business did not have any science, methodology or language that could bring about true team collaboration. Many companies have experimented with collaboration ‘workshops’ and other techniques. But none of these has yielded a breakthrough that gives lasting results.
To deliver true team collaboration, or ‘smart collaboration’, Method Teaming uses a unique language, math and science. This is several evolutionary steps beyond anything that has come before. The language can be learned in minutes and allows people to understand each other’s capabilities in the context of their own.
But here’s the good news for hard-pressed PE professionals. The complex output of all of this science can be rendered in a simple dashboard that anyone can read. The detail is available too. But the ‘team dashboard’ provides insight at-a-glance into how far the executive team is already capable of smart collaboration and whether it has the right talent make-up for its mission. The dashboard also indicates how to move an average management team further up the road towards perfection.
The dashboard increases PE’s oversight and de-risks much of the uncertainty surrounding the people dimension. It endows the PE professional with an insight into what’s really going on in the management team and allows them to make a more valuable contribution. These executive team analytics will complement the financial analytics already at his/her disposal to deliver a completely comprehensive view of the company. The chances for any unpleasant surprises on the people dimension are now considerably reduced. This renders the PE firm’s investment considerably more secure than before.
The business case for introducing Method Teaming could be as follows:
Size of investment (e.g. $10m) x Expected exit multiple (e.g. 2.5) x 10% (Expected increase due to MT program and dashboard) = $2.5m gain.
To understand what Method Teaming could mean for your next exit, Contact Us.