Mapping leadership styles in private equity

November 2016 | SPOTLIGHT | PRIVATE EQUITY

Financier Worldwide Magazine

In problem solving, innovation and financial performance, diverse teams have been proven to outperform homogenous ones. Yet the bias (conscious or unconscious) that nudges leaders to hire and promote people ‘just like us’ remains strong.

For example, our study of European private equity (PE) professionals finds that senior industry leaders cluster around just two leadership styles out of a possible eight that we identified, suggesting that, compared with more diverse leadership teams, many PE firms are at higher risk of insular thinking, diminished problem-solving abilities and ultimately, poorer investment decisions.

These are among the findings of a survey of 51 managing partners, partners and principals of European private equity firms who completed an online leadership assessment. The survey ascertains a leader’s primary leadership style as well as his or her access to eight styles we have identified: (i) collaborator – developing others, team-building, empathetic, attracts talent; (ii) energiser – charismatic, inspiring, connects emotionally, provides meaning; (iii) pilot – strategic vision, manages complexity, team-building, clear POV; (iv) provider – intellectually confident, operates with conviction, driven to provide for others; (v) harmoniser – creates positive and stable environments, reliable, diligent; (vi) forecaster – depth and breadth of knowledge, conceptual thinking, anticipatory; (vii) producer – execution- and task-focused, linear thinker, structured, loyal to tradition; and (viii) composer – independent, creative, problem-solver, decisive, self-reliant.

The survey found that two-thirds of European private equity leaders have either ‘forecaster’ or ‘pilot’ as their predominant leadership style. The prevalence of the former style is perhaps unsurprising, as forecasters tend to be deeply knowledgeable in their particular area of expertise, adept at critical analysis, and often excel at anticipatory thinking. Indeed, most private equity professionals started in banking or consulting and are equipped with skills in analytics and finance, progressing along similar career paths in what has grown into an established industry.

It is easy, therefore, to imagine that forecasters would rise to the top of private equity firms, as in many ways their leadership style fits the work. Forecasters love gathering data and deepening their expertise, tend to be happiest when they can synthesise observations, and are typically adept at harnessing their skills to foresee events and trends. Colleagues view them as knowledgeable and farsighted.

Similarly, ‘pilots’ are understandably common in European private equity, given that they tend to thrive in ambiguous, complex, fast-changing, and challenging environments. Pilots also tend to be forward-looking, capable of generating compelling strategies and translating strategy into action. Because they have clear opinions and relish challenges, they exhibit an intensity that many colleagues admire, but that some may find draining.

Beware the blind spots

All leadership styles contain blind spots, not just strengths. Could these styles therefore be holding back the private equity industry as much as they help define it? Forecasters, for example, tend to become overly wedded to their own thinking, and can be slow to make decisions in unfamiliar circumstances, as their predilection is to continue gathering data to feel more informed.

Forecasters may also often have a hard time influencing or gaining buy-in from people who ‘trust their gut’ more than the numbers when making decisions. Yet, forecasters working in private equity encounter that trait with regularity – in the form of early-stage entrepreneurs, founder-owners and family businesses.

Such a fixation on data could lead forecasters to rely too much on financial engineering to realise returns, potentially stifling a portfolio company’s innovation. And the priority they place on intellectual reasoning can crowd out the emotional connections that leaders of other styles may require for inspiration. This is an important point as many of our survey respondents stated they wanted more PE leaders with ‘soft skills’, citing inspiration, imagination, passion, energy and emotional intelligence as desired traits.

Pilots, too, have their blind spots. Their strongly held views can dominate the room and leave little space for others to freely share their thoughts and insights, thus having a stifling effect on creativity and encouraging groupthink or false consensus. Pilots may conduct meetings as if the right decisions have already been made – or are obvious – rather than treating meetings as opportunities for learning. Moreover, pilots often have difficulty stepping back and letting others lead.

A missing skill

In addition to analysing the most prevalent leadership styles among European PE leaders, we also determined which styles were rarest, as these represent opportunities for firms to add, or further develop, particular leadership strengths. Notably, the least prevalent style was that of the ‘energiser’, a style characterised by the ability to build enthusiasm and inspire buy-in and engagement in others. Energisers tend to help others to see the meaning in the task at hand – a valuable skill that our research suggests is relatively rare among the organisations we studied. The roots of this finding may stem from the industry’s historical tendency to be an ‘up-or-out’ environment with a hard-nosed approach to doing business.

Regardless of the reason, PE firms that lack the cooperation and people-first focus that ‘energisers’ bring could be at a disadvantage in times of rapid growth or disruptive change – environments in which energisers thrive. Similarly, energisers bring an abiding optimism to their interactions, a valuable leadership trait in any business climate.

Harnessing the power of diversity

It is important to note that a leader’s style is not fixed: leadership is situational and evolves with time and experience. Moreover, leaders are likely to have some level of ability in all the styles to varying degrees. Nonetheless, most leaders tend to continue using a default style or a small set of styles that they find most comfortable.

While an individual PE firm’s leadership team may have access to a wider range of styles than our findings would suggest, on balance, PE firms in Europe can find it difficult to ensure that all traits are represented. The leadership team should always have relevant content expertise, but recognising and expanding upon the value of engagement, team performance and thought diversity can often lead to better firm performance.

The most troubling risk facing private equity firms with ‘cookie cutter’ leadership teams is that a lack of diverse viewpoints could lead to weaker investment decisions. When a limited number of leadership styles dominate, the quality of communication decreases and critical questions go unaddressed by the collective intelligence of the group. After all, investment committee members serve crucial roles in debating decisions and assessing risk. Without a range of leadership styles and experiences to draw from, committees could miss the chance to realistically appraise various courses of action – or identify them in the first place.

Ultimately, private equity firms should ask themselves if the leadership styles in their investment committee (and broader organisation) is a strength or vulnerability. Against a market backdrop of high-entry pricing and low-growth across Europe, sponsors need to identify opportunities that create value in portfolio companies or even venture into new business territory. Post-acquisition, a PE firm’s leadership style rarely determines the development of a 100-day plan but perhaps it should be taken into account in order to overcome market headwinds and maximise value. Private equity firms that embrace more diverse ideas and approaches are better positioned to master new challenges and, ultimately, drive value creation.

Richard Thackray is a partner and leader of the private equity practice in the EMEA region, and Tom Thackeray is an associate, at Heidrick & Struggles. Mr Thackray can be contacted on +44 (0)20 7075 4000 or by email: rthackray@heidrick.com. Mr Thackeray can be contacted on +44 (0)20 7075 4000 or by email: tthackeray@heidrick.com.

Richard Thackray and Tom Thackeray

Heidrick & Struggles