Periodically, we review the underlying trends in our conversations with our Private Equity (PE) clients and prospective clients. As one might expect, in part these conversations run throughout working relationships. In addition, we conduct market research and speak to many prospective clients.
This is the second of two short articles. It summarizes the methods used and the practical aspects of what they do. Our first article was a summary of the key trends we have seen in those conversations and is mainly focussed of the commercial aspects of how they position and handle Management Due Diligence (MDD) as part of the overall Due Diligence process.
Six Notable Takeaways
- There is mixed experience of using the rigorous MDD methods (e.g., psychometric assessment/ tests etc.). This ranges from zero to, at most, irregular “as needs of the situation demands” usage.
- The latter “as needs” approach involves a wide range of providers. Moreover, we noted previously that there seems to be little agreement around what constitutes value for money for clients of MDD and a good service.
The methods for MDD range from reference checkers and interviewing through to psychometric testing and interviews.
Typically, and again, as noted previously in the perspective taken to MDD, the focus is one or two at the most senior levels. In smaller Private Equity firms, this is usually the founder(s) and one or two others involved.- There is little clear evidence (especially in smaller Private Equity firms) of using the more rigour approaches available such as Psychometric tests or similar, to benchmark qualities that are not amenable to measurement other methods such as interviewing or by inference from references e.g., altruism. The picture in some of the larger Private Equity firms we have spoken to.
- Some Private Equity firms use assessment methods of dubious quality rather than employing those that more valid and have a clear track record of practical use.
Moreover, like any tool, such tests are only as good as the hands using them. The experience of the consultant using the tools and tests is important as is experience of the PE client handling their conclusions.
Alas we know that the quality of consultant can be wide and varied and, in some cases, style takes precedence over substance. - Other than by inference, there is little consistent focus on benchmarking the typical negative traits the Private Equity firms tell us are found in some portfolio businesspeople.
Moreover, these qualities are difficult to access at interview and include traits such as arrogance, short temper, procrastination, trouble saying no etc.
Our experience too, tells us that these some of these qualities emerge later in the working relationship (and potentially, for some Private Equity firms, too late and after agreements made, contracts signed etc.) - One final noticeable trend is a lower focus on motivation. This is not “job satisfaction” by another name i.e., what it is that the person finds engaging. It is where and how will they direct the energy and effort.
This is not just in the day-to-day sense but in the longer term too i.e., will the candidate remain in the medium to longer term or look to leave soon after the investment process.
Our Private Equity clients tell us that the longevity of leaders in the business is a challenge as is ensuring their motivation is directed onto addressing the right priorities.
Summary
In summary, there are, of course, many similar takeaways from speaking with and working with clients and these points here are just the trends we have noticed over the last 12 to 18 months.
We are not presenting them as the definite picture of Management Due Diligence in the UK. Our conclusions are more modest. It just struck us that in speaking to PE firms, that there seems like some sensible debates to be had.
Perhaps the overarching conclusion, is that our corporate clients are well ahead in having had the debates and made sensible methodological decisions accordingly.
About The Author
Dr. Steve Sloan is an acknowledged leadership expert and consultant who has over 20 years’ experience advising clients globally.
He can be contacted via email or by calling 07585 548420
