In a speech at Bloomberg’s private equity forum in London on Thursday, the message from Guy Hands, chairman and chief investment officer of Terra Firma, was clear: he has no idea what 2017 has in store.
“If we want to predict what will happen in 2017, we may just as well look to the stars,” Hands told attendees.
In a world where “unpredictability is the new norm”, those in the private equity industry should “stop focusing on what we can’t control, and focus instead on what we can control”, namely one’s own organisation.
Hands said he had changed his thoughts “radically” in the last decade on “what it means to build a first-class organisation in a world where no-one can predict what will happen, and no-one is an expert”.
In contrast to the “individual heavyweights” of the pre-2007 era that generated huge wealth for both their banks and themselves – “the biggest swinging d**ks” as Hands described them in reference to a phrase popularised by Michael Lewis’ 1989 book Liar’s Poker – today the focus should be on building strong teams, Hands said.
“In 2007, people could behave how they wanted – performance was the only thing that mattered. In fact, if you were really bad, but really good, you actually got paid better,” he said.
“Today, these people should be fired. Otherwise the same mistakes will be repeated.”
Hands demonstrated to the audience how Terra Firma has modified Jack Welch’s diagram of four types of employees, which Welch identified while chairman and CEO of General Electric. This includes “keepers” that deliver strong results and fit with the firm’s culture; “team players” who fit in culturally but need to be coached to improve results; “no-hopers” who do not deliver or fit culturally; and “tough calls” who perform highly but do not align with the firm’s culture and values.
In Hands’ redrawing of the diagram, there is very little space for “tough calls”.
“In a world which is so uncertain, we only want people who promote teamwork and knowledge-sharing,” Hands said. “We don’t want people who only want to create wealth for themselves.”
Hands spoke of strengthening Terra Firma’s own management in the last 18 months by bringing in Justin King as vice-chairman and head of portfolio businesses and Andrew Géczy as chief executive officer.
“What makes them stand out to me is that they are committed to building a firm with the right culture, which can continually adapt and succeed in a world where unpredictability is the new norm.”
Hands said that although today’s environment “may be more difficult than ever” and 2017 will be another year of uncertainty for the industry, he believed there would be opportunities to invest. He added that both the risks the industry faces and the tools needed to address them “are not the same as five, 10 or 20 years ago”.
“The biggest challenge will be finding good deals and having the right resources to manage them,” he said.
“If we continue to build quality businesses, work together to achieve this and retain an ability to adapt, we can overcome the volatility to succeed.”