Practically every fund out there - especially if they are concentrated - talks about analyzing the quality of management teams and only investing ("partnering") when there is a very strong management team. Can anyone share how you go about the due diligence process for assessing management. I feel like everyone can say: "well I look at their capital allocation track record and blah blah blah" - but we are all assessing ROIC and capital allocation track record anyways. You can read what they say at investor conferences/ earnings/ etc., but it is a bit subjective to qualify any of your insight from that as "good" vs. "bad". Same as mgmt. meetings and 1v1s, you get a sense, but idk sometimes there are people who are just good salesmen.
Anyways, interested to hear about how some of you really go about assessing the quality of management. Or is it truly just looking at how the company has performed and then being like - well they did a good job look at the performance of this business! They grew margins, improved returns, returned cash at the right time, therefore they are super high quality!
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My background is in MF private equity and large cap public equity activism and I would characterize my viewpoint as follows: good management is essential to a good investment, but it does not need to come from the existing management team. A company can perform well (and even outperform peers) due to luck or exogenous factors which tell you very little about the abilities (or lack thereof) of the leadership team.
We have a structured approach to evaluating management which includes focusing on the following: (1) the approach and rigor with which they make decisions, (2) the relevancy and complementarity of skillsets at the management and BoD level, (3) their humility and proclivity to seek third parties to fill informational gaps, (4) the ability to attract and properly motivate exceptional people, and (5) their ability to remove emotion and attachment from decisions. There is more to it than that, but if you can check those boxes you'll do well.
Answering those questions is difficult as an outsider but is best done by getting to know the team / board and the leveraging of all company, industry, and legal/regulatory/governmental contacts you can. To paraphrase the founder of my prior fund, "you will never fully know a person only by speaking to their friends."
I like to go back, look at each major decision point management has made (entering a new market, wholesale changing the pricing model, acquiring a company, hiring a President / CFO level person, pursuing a financing, etc.) and "grade" the outcome. For a 2 year CEO, this might be 3-4 decisions, for a 10-15 year CEO, there might be a dozen decisions. I try to calculate the ROIC of those decisions as best I can, determine the reasons it succeeded or didn't succeed (to make sure they're getting credit for what they actually did, not luck / bad luck), and tie it back to valuation as best as possible (e.g., if a $2bn EBITDA / $40bn EV company entered a market successfully but it only drove $10mm of incremental EBITDA, that's likely only a ~1% impact on EV whereas a $10bn EV acquisition where they're banking on ~$100mm of run rate synergies can realistically drive the share price up or down 10-20%).
Besides that, there's also a credibility / pedigree angle. You can tell when its a scrappy management team in over their head or when its an ex-[insert blue chip name in sector] EVP level person moving down to the mid market to bring some experience that's otherwise rare in that world. The market definitely favors the latter, though I think it's more important to be nuanced and understand why one or the other might succeed.
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