Why so emotional: How PE execs factor emotions into decision making

Emotions that are unconsciously repressed or denied could result to GPs missing out on deals and push practitioners to their limits, according to a report from DWS.

Private equity decision making is not entirely rational – it is often wracked with particular emotions that have to be kept in check and kept under wraps, a study has found.

Research led by DWS alongside risk consultancy Cooper Limon, Warwick Business School and MJ Hudson found this contradiction in private equity investing – most practitioners are required to present a sense of certainty to their stakeholders to convince them about a long-term investment, even though they may doubt the decision themselves.

The survey, which gathered responses from more than 100 LPs, GPs and advisors, found that 85 percent believed they need to convey this sense of certainty and on one level convince themselves as well.

Those showing doubt are far more likely to lose out, even if their doubts are based on detailed analysis and sensible questioning, said one respondent in the survey.

In fact, seven out of 10 agreed that investments usually do not play out as expected and almost all respondents (96 percent) agreed that living with uncertainty is an unavoidable part of the industry.

When it comes to dealmaking and capital commitments, 86 percent said interpersonal chemistry with prospective investees was important.

This is why the covid-19 crisis is slowing fundraising and dealmaking, said Mark McDonald, global head of private equity at DWS. He added that it is harder to create long-term partnerships at a time when face-to-face meetings are impossible and the ability to enforce trust over a video conference is certainly more challenging.

“LPs can do all the analytics, track record and analysis in a week if they want to, but what they’re really analysing is you as an individual or you as a team, so there are a myriad of emotional factors at play,” McDonald said, adding that it can take six to nine months for an LP to really get to know a GP.

However, truth in emotions is not talked about in private equity. In fact, 40 percent of respondents said emotion is a taboo subject. There is also a general view that “allowing emotions to enter practitioners’ decision-making process will lead to poorer decisions,” the study noted.

Although generally emotion is recognised as helping to make good decisions in the private equity industry, the report found that this belief only holds if it is not referred to directly as “emotion”. Instead, calling it “intuition”, “conviction’ and “passion” are acceptable.

Over half of respondents also said it was hard to find time to stop and reflect. Even those who do are more likely to be reflecting on the practical ‘rational’ agenda than their emotional state, noted David Cooper, founding partner of Cooper Limon. As a result, respondents may not be in touch with the actual emotions which they experience from moment to moment – especially the subtle nuances of feeling and the way that it is possible to experience more than one emotion at once, he added.

Cooper also pointed out that while the responses appear to confirm that there is a lot happening on an emotional level in PE, it is important to recognise that the scores from the survey represent a report of the emotions which practitioners think they experience in practice. For various reasons, this may not provide a reliable picture. In addition, some emotions can be susceptible to post-hoc or after-the-event distortion, and also difficult to access in retrospect, such as feelings of anxiety.

Private equity is a highly-charged asset class and when emotions are unconsciously repressed or denied, “they can come back to bite the hand of the PE practitioner”, the report noted.

This can result in practitioners missing out on deals, squandering valuable resources such as money, time and attention, and pushing them to their limits, increasing the risk of burnout.


Mark McDonald, global head of private equity at DWS, led the study. Other contributors to the research include Richard Taffler, professor of finance at Warwick Business School; David Cooper, founding partner of Cooper Limon; and Matthew Craig-Greene, managing director at MJ Hudson.

– Adam Le contributed to this report.