It’s really strange. PE firms have, on balance, done really well during the pandemic. Adjusting to zoom calls and employees working virtually, deals have gotten done, some great exits have been achieved and if you’re just looking at the scorecard, the past couple years have felt like a big success.
But, unfortunately, much has been lost in the process. Many PE firms have been dying from the inside – and this does not augur well for the future unless steps are taken to address this.
Specifically, I am talking about the ‘Human Element.’ And, there are at least three major areas of significant deterioration. First, the ‘Serendipity’ of working closely together in an office environment, traveling on planes together. All those spontaneous ideas that occur and are shared ‘on the spot’ with teammates and partners. This is where new ideas and breakthrough opportunities come from. But, generally, they have not been happening – and the ‘innovation cupboard’ is getting bare.
Second, ‘New Relationships.’ Deal origination is the lifeblood of the business – whether it’s courting a potential prospect with a series of in-person meetings sometimes several years in advance or even trying to ‘win a deal’ during the sale process when there is an opportunity to develop a special rapport with an owner or management team. It’s been incredibly difficult to engage in these activities during the pandemic and thus an eroding pipeline – not only for deals on the immediate horizon but also an erosion of the human capital and goodwill that establishes the foundation for investments down the road.
And, third, ‘Mentorship and Talent.’ Private equity is truly a mentorship business. The close working relationship between the more senior people in the firm and the younger professionals – engaging together on deals is key to the development of talent. Newer, younger professionals, while often proficient in some of the technical skills, really learn how to ‘do the job’ – ‘on the job.’ They pick of valuable clues on how the business works by seeing their more experienced colleagues in action. Moreover, often they develop a close personal bond with their mentors which typically also translates into a deepening loyalty to the firm and an embrace of firm culture. Needless to say, when analysts and associates have been working remotely from ‘wherever,’ these less tangible, yet extraordinarily important activities have not been happening.
So, when taken all together – the erosion or absence of Serendipity, New Relationships and Mentoring – cannot help but to have taken a serious toll on PE firms and their prospects for the future. Perhaps not the immediate future. But, it’s an emptying of the tank. In a sense, it’s a loss of the essence of what makes up a firm. Certainly, those firms that are aware of this erosion can take action, and I suspect remedy much of this. Perhaps even gain a competitive edge. However, for those who are blind to these factors and do not invest to take significant remedial action, they are destined to fall behind, and inevitably come up short, sometime in the not too distant future.
The implication, of course, is to take stock. Where is your firm on these dimensions? How much erosion have you suffered? And, what are you doing to address these issues? And, how can a program of accelerated, aggressive remedial action give your firm the best chance of ultimate success?