Leadership qualities are exposed in times of economic dislocation and organisational stress, while bullish, economically vibrant periods cover up many leadership weaknesses. The current covid-19 pandemic requires strong and successful leadership at the multi-national, national and local level to deal both with the emerging human tragedy and the economic consequences.
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While we are seeing successful and less successful leadership styles at work on the multi-national and national stage, the leadership of PE investment organisations that have an important part to play in relation to tens of thousands of predominantly mid- and smaller-sized businesses will be important. Which managing partners or CEOs of the GPs in our industry will be successful in steering their organisations through the current period of pandemic-driven dislocation, and which will be less so? We will learn a lot about GP leadership in this time period, and most importantly, I believe, we will see significant differentiation in decision-making, and ultimately performance, between leaders who have actively and successfully built teams of senior peers, versus those who have paid lip service to the partnership concept.
In my 30-year professional career I have been fortunate to work closely with, and to observe the leadership styles of, a wide range of both corporate CEOs and private equity GP managing partners, CEOs and founders. It has struck me for many years now that virtually all such leaders will articulate an apparent understanding of the importance of team-based leadership approaches founded in a desire to build high-quality groups of peers with different backgrounds and experience bases with the professional and personal maturity to provide robust challenge and debate, but the reality will often look very different.
Nowhere is this truer than in leadership of private equity GPs, the very organisations that we would hope to represent best practice in such an area as they are quick to position themselves as disseminators of best practice around leadership and governance across their portfolio companies. While there remain some GPs that look like personal fiefdoms of a dominant individual who has no interest in shared leadership, these are the minority. Most GPs, particularly in the small- and mid-cap space, while frequently founded by one or two dominant and talented individuals, ostensibly operate as partnerships. However, I have found there to be two very different archetypes.
First, there is the managing partner who has built a group of “partners” around him or her, but the title “partner” belies a subordinate relationship. It’s more akin to a senior employee without much sense of ownership providing limited challenge, with a sense of deference to the leader, where decision-making is concentrated in the managing partner. For lack of a better term, it’s the “partnership in name only”.
Second, there’s the managing partner who has the confidence to surround him or herself with true peer partners, with the maturity to share leadership, provide robust challenge and dissent where necessary, where everyone jointly feels ownership for the whole organisation. This is the “true partnership”.
While these two archetypes can often look almost identical at first glance, and particularly in fund marketing settings, current and prospective limited partners can identify and differentiate between these. This can be done, for example, through in-depth ex post review and/or direct observation of investment committee processes; detailed review of partner evaluation processes and the implications of outcomes; and discussion with portfolio company chairmen and CEOs on the nature of their interactions with GP partners and who they look to for real investor-level decision-making in relation to their businesses. Delving deeply into specific examples across each of these areas during diligence is typically much more valuable and instructive than more general observations.
There are real dangers in the current environment associated with the “partnership in name only”, while those operating as a “true partnership”, I believe, will navigate 2020 more successfully. The covid-19 pandemic is resulting in justifiable health- and economic-related anxiety across individuals in GP organisations and in portfolio companies, while revenues in many industries have been decimated. Many companies will struggle to survive without significant government support.
This calls for rapid, but carefully balanced, communication and decision-making by GPs; communication and reassurance to employees, investors and other stakeholders; implementation of protective health and welfare policies and approaches at all portfolio companies; decision-making on cost structures, investment plans, near-term financing needs and so on at the portfolio company level. Rapid decision-making in such an environment, with less than perfect information, requires an experience base and a breadth of perspective that no one individual has, no matter how talented.
This means, ideally, close collaboration across a partnership of peers with different, yet complementary, backgrounds, areas of professional experience, gender and, where possible and relevant, national and cultural backgrounds. Such groups will not only make superior decisions but will also develop more nuanced communications strategies. Conversely, leaders who dominate decision-making will make more frequent errors of judgement, applying their narrower experience base to an environment that they have likely never encountered before. They will take on an unnecessarily heavy individual burden and they are more likely to communicate in a singular manner that also risks reflecting individual stress.
As we ultimately emerge out of the other side of the current crisis, there will come a time when it will be worth evaluating these lessons for leadership to ensure that LPs, and the GP community, play their part in strengthening the partnership model for the future.
Neil Harper is chairman of Turkven, former chief investment officer of Morgan Stanley Alternative Investment Partners and a former partner of McKinsey & Company.