The Importance of Strategic Edge in Private Equity

The private equity (PE) asset class has prospered in recent years, but as Bain & Company notes in its 2016 Global Private Equity Report, this may not be the case for long. In light of decreasing GDP growth around the world as well as other factors, investors anticipate that the double-digit gains that have become familiar over the course of the last four years may become a thing of the past. In fact, Bain predicts that the industry will settle at a “new normal” marked by positive cash flows but returns that are less stellar than those of the recent past.

If these claims are true and the industry is about to return to a resting point, then PE firms need to devote renewed attention to strategy. Fund managers should develop ways that their firm can remain successful and competitive in the changing PE landscape, Bain argues, by emphasizing their ambitions and strengths to create a “repeatable model” for strong investment. And since it takes time to implement a successful strategy, PE firms need to start now.

According to Bain, PE strategy should begin with a firm’s stated ambitions or visions of future successes. The next layer of strategy is to develop concrete goals and action items that allow firms to realize their ambitions. Lastly, a firm should look to hire a talented team of professionals to put this strategy in motion. In the report, Bain suggests three areas where a firm can hone its strategic investments: taking advantage of its “investment sweet spot,” identifying thematic insights, and mobilizing talent and resources.

Bain also asserts that PE firms’ strategies should emphasize repeatable results. As the PE environment continues to change in response to new trends, such as a preference for larger firms by investors, strategies need to be able to adapt and ensure steady, consistent returns even as the market evolves. Firms will need to be able to communicate the repeatable nature of their strategy to potential investors, so in addition to being ambition-oriented and repeatable, PE firms’ strategies should also be easy to articulate to clients.

To read Bain’s full report, click here.

Should Private Equity Firms Integrate ESG?

A recent Forbes article explored the opportunities that private equity (PE) firms could take advantage of by integrating environmental, social, and governance issues (ESG integration).

Considering the ideal position of PE firms to improve the world around us, it’s certainly an interesting suggestion that the writer makes about the role PE firms can take in developing ESG initiatives within the firm’s portfolio.

To explain how ESG integration could benefit PE firms, Forbes presents a compelling outline of the many social and financial boosts that could potentially happen. And there’s other research that suggests a similar positive influence.

According to this report, the PE industry possesses huge assets, somewhere around $2.4 trillion. Because of the size of the industry, it indicates the stage is set for PE firms to take a huge leadership role in ESG integration. Another reason PE firms are in such a good position to improve ESG integration is the most recent holding period for those companies in a PE firm’s portfolio. The holding period of a company’s stocks for a PE firm in 2015 was 5.5 years, while on Wall Street, it’s a mere 8.3 months. That short time period is not nearly long enough for a company to properly conduct ESG integration because it’s necessary to have a longer period of time to see concrete results.

Another possible benefit for PE firms? These entities are not held to many of the same regulations as listed companies, so PE firms can more freely check up on a portfolio company to ensure it’s being properly managed. In the case of evaluating ESG integration, this could mean determining how much value the company is creating, which could in turn influence future investment decisions.

Notably, a recent survey cited that businesses say risk management is their largest reason to begin ESG integration. Some experts argue that integrating ESG values is a first step to mitigating risk and helping companies appeal to their shareholders and potential investors who need greater assurances.

European PE firms are also honing their focus on ESG investments. In the last month, Invest Europe–a trade association for European PE, venture capital, and investors–published a due diligence questionnaire for private equity firms interested in ESG so that the firms can better assess potential ESG investments. That questionnaire is available here.

The Business Value of Being a Great Listener

In personal relationships, most people realize the benefits of being a great listener and aspire to fit into this category. But the value of listening well translates to business as well.

Not long ago, I was intrigued to see a Harvard Business Review (HBR) article, “What Great Listeners Actually Do.” When a manager or advisor is a great listener, the article suggests, it helps to engender other people’s trust. People come to great listeners and really value their presence.

Unfortunately, reports HBR, many people believe they are good listeners, because they think there are simple rules to follow such as: stay silent while someone else is talking, nod to indicate your engagement, and be able to repeat whatever the person said to you. But, in fact, those are not the truest signs of a good listener and do not reassure the speaker that you’re actually listening or processing what they’re saying. So, if these aren’t qualities of a good listener, what are? Here are the four traits that HBR writers Jack Zenger and Joseph Folkman highlight.

Ask questions

Don’t be silent while someone else is telling you about something. While constantly interrupting isn’t good either, there needs to be a solid balance between the two. Instead of being completely silent, periodically ask questions. This habit shows you’re engaged in what they’re saying and processing it enough to ask thoughtful questions because you want an even deeper understanding of the situation.

Convey confidence and support

People know another person is listening to them when that person makes them feel “supported,” says HBR.  To remain silent might signal to the speaker that you doubt the importance of what they’re telling you. Even worse, if you pipe up too often with criticism, critical then it can discourage people from sharing information and ideas with you because they think you’ll just shoot them down. The HBR article suggests when you craft an environment that welcomes the others’ thoughts, you let people know that you’re willing to find meaningful aspects of their contributions.

Establish a conversation

By asking questions and occasionally giving your input, you can develop a cooperative conversation where both parties respect one another and know the other person is there for them. It’s also important to offer feedback, even though we often hear people complain about others not listening to them, because they instead immediately try to solve the problem. Offering suggestions all depends on how you do it; if you offer suggestions in a gentle way, while also reiterating the issues you’ve already discussed, the speaker will be more likely to listen. When people already think someone is a good listener, they’ll be more likely to accept their advice.

Clear away distractions

Decluttering the space around the two of you lets the speaker know you’re willing to focus on him or her. Put away your cell phone or laptop and don’t look at it during the conversation. By putting away these objects, you’re showing your commitment to fully invest in the person in front of you. Neither of you will be distracted by outside influences and can fully focus on what’s occurring in the moment.

Positioning Emerging Managers for Success

I saw the latest research analysis by Callan Associates, “Aspiring Managers: Negotiating the Dual Realities Facing Diverse and Emerging Managers,” about the distinct challenges facing today’s emerging managers. Given my years researching and investing with emerging managers, the topic was especially relevant. The extended Q&A features Callan’s Chairman and CEO Ron Peyton and Callan Connects Manager Lauren Mathias. My favorite quote from this research piece is Callan saying that “One last thing to remember is that all managers were once emerging managers.” At the end of the day, we have to back new talent.

In the article, Peyton presents an insightful overview of the “dual realities” swaying the outcome of success for emerging managers, saying:

“On one hand, institutional investors are increasing their interest in diverse and emerging managers as they seek diversity and new talent for their rosters. On the other hand, these managers contend with mounting client demands, distribution limitations, declining mandates, and an overall downward pressure on active managers and management fees.”

Despite several barriers that emerging managers experience when trying to enter the market, they also have a unique “competitive advantage,” says Peyton.

“[They] can be willing to take on more investment risk than established firms because they are more ambitious to demonstrate their talent,” Peyton explains. “An established firm is not going to take a lot of business risk because it doesn’t want to lose what it has. There are two sides to this issue, of course. A small firm can get too ambitious and blow up. But if you pay close attention to governance, have smaller mandates, and multiple diverse or emerging firms, you can spread out that business risk.”

Trends Among Emerging Managers

As for the noticeable trends in the product offerings of emerging managers, Callan’s executives point to “the alternatives side” as one of the greatest areas of growth.  “We’ve noted a lot more direct hedge funds and real estate funds—even some private equity, as well,” says Mathias.

Surely, the subject of emerging managers or diverse managers isn’t new to any of us. Over the years, we’ve heard the media’s assertions that “emerging investment fund managers consistently outperform large and brand-name investment firms, and they do so with less volatility of returns.”

Yet as often as we use the phrase “emerging managers,” there’s a discrepancy about what the  term even means. For some, it’s any new investment firm with a small (under $2 billion) asset base. For others, the term alludes to firms that are owned by minorities and/or women. Callan extends its definition to include disable-owned firms as well.

Peyton, for one, says that he hopes “the term ‘diverse manager’ becomes a thing of the past.”

“That is a very long-term hope and there are miles to go,” he tells the study’s interviewer. “But I think obsolescence of that term is the end game. We are hoping for an industry in which every manager is diverse.”
To read the full Callan Associates research article, Aspiring Managers: Negotiating the Dual Realities Facing Diverse and Emerging Managers, visit


Welcome to Raudline’s blog. She plans to share information relevant to the consulting industry. Stay tuned!