How Firm Culture Drives Returns
If you were to ask PE sponsors to define what culture means to them or their firms, you’d be likely to receive the same number of answers as the number of people you asked. However, where there would be widespread agreement and a mountain of evidence – is that culture is critical to success. At young or smaller PE firms, ambitious professionals can feel underappreciated, deprioritized or poorly executed on. It is universally understood that culture matters, and it matters deeply.
There is culture for culture’s sake, which is focused on making work life enjoyable and rewarding simply for the benefit of employee morale and happiness. It has immense benefits, but here we’re focusing on the development of culture for the purpose of building a firm that produces better returns.
As in most industries, the private equity culture for the broader firm begins with the partnership or senior leadership. The health and harmony of the partnership is a key indicator of how the rest of the firm operates because it sets a tone and example for the entire investment team. As ambitious young professionals look forward in their careers, they envision the path toward partnership and what that may look like for them.
If the culture of the partnership isn’t one of collaboration and respect, it influences the long-term thinking of the upwardly mobile talent. Typically, what we see as the key underpinning of a healthy partnership is a strong and equitable sharing of the ownership. Firm, or management company, ownership has distinct issues, but the division of carry at the fund level is where LPs really like to see GPs translate their extensive management experience into a “culture of ownership” across the team. In other words, the incentives and rewards for the rising group of future firm leaders need to be in place for success. Retention of talent is critical for success in deploying money consistently over the course of sequential funds and that’s only possible if the right system is in place.
Firms that have a strong recruiting process or farm system for their talent protect that group aggressively given the time, knowledge transfer and plain competitive dynamics. This is a huge focus for investors with aging founders at PE firms and is becoming an issue for multi-fund relationships.
It’s important to have a smart training program and cross-education program that influence the team to develop everyone’s skills and re-orient the approach for junior professionals. Small private equity firms try to place a ping pong table or host rec areas for employees to encourage morale, but what means the most for the key professionals is a focus on equitable division of rewards/incentives and a developed career trajectory.
In short, culture is more than foosball and ping pong tables in a rec room for associates, but nobody is complaining about a few extra perks that make office life a little more fun!
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Sixpoint Partners, LLC, is a registered broker/dealer, member FINRA (http://www.finra.org) and SIPC (http://www.sipc.org). Sixpoint Partners Asia Limited is licensed by the Securities and Futures Commission (http://www.sfc.hk).