What separates the good from the great in Private Equity?

Thanks Layne Staley and BobTheBaker for firing numerous flares into the sky.

Take this with a couple disclaimers. I am only one guy, and I am not yet silver-haired - I haven't been around forever.

I think this falls into two obvious categories: soft skills and hard skills. The two overlap, intertwine, and reinforce each other in innumerable ways.

Soft skills.

Rather than bulleting out a bunch of checklist items, I'd rather present a couple 'mindset' pieces that I've observed contribute very meaningfully to success.

- Relatability:

This is a people business through and through. I struggled with this a lot.

It's not enough to do the work the right way (reliably, communicating well around your bandwidth / other deadlines / questions en route, proactively adding value by accomplishing unstated second-level objectives), and that's no mean feat on its own. It's hard to be a top-flight generator of work product ... and that's simply table stakes in this game.

You have to do the work the right way while being the right type of person. George_Banker amusingly terms it being a "money salesman."

I'll paste a portion of another comment I made last year that I've oddly gotten several notifications on this past week.

APAE:

Relatable means being an enjoyable presence on the floor. Note that I didn't say 'tolerable'. People self-censor so rigorously out of fear of standing out and getting punished.

This (the self-censor) seems to come in two primary forms; the person who's so fearful of any potential misstep that they eventually turn into the equivalent of the dog that's been beaten enough that it flinches each time a human near it raises a hand, or the person who knows they're so far from the cultural norm that they box themselves up to look like a drone.

Both of those look tolerable, but the first archetype is someone you can't stand to be around because they're so ingratiating and eager to conform to whatever they think you're looking for while the second is someone who looks either so disengaged or so ready to explode that you kind of shy away for your own safety.

Don't be afraid to bring your own personality. You don't have to be stuck talking only about the weather, sports, or vacation plans for your whole two-year stint. It's okay to bring more of your authentic self to the office. Be personable, ask real questions about the people you work with, and listen when they talk. Human moments in this industry are few and far between, and if you're the guy who becomes known for bringing them, that will serve you well. People will smile genuinely when they see you, you'll develop deeper relationships with the people who manage you, and as your career progresses and you see certain people far less frequently as you change roles, the warmth of your relationship won't fade like it does for the people who simply clock in and clock out day after day.

For me it actually meant tightening up how I presented. I have a lot of different interests. I'm expressive. That can be overwhelming, so narrowing myself to come across as less of an overbearing personality helped me be more relatable.

This matters.

The guy who's spent the past 12 years as CEO of the company he started, sweat and bled over, and grew through his own effort is going to be really, really picky about who he lets take 80% of the cap table with a buyout clause for the remaining 20% in five years.

The lawyer who made partner off the back of a college roommate who got into a good fund that does a new bolt-on every single quarter for each of its platform companies and threw him the legal work for each of them is going to be really careful about who he introduces to that old roommate over golf as 'the right guy who could maybe take one of those babies off your hands now that you're thinking about exits'.

- Self-awareness:

There could be novels written about this. Put shortly, most people in this industry have a very strong sense of self. That strength often leaves little space for inward reflection or evaluation.

Simply taking the time to think critically about how you're doing in each aspect of your role can surface key areas of development you can improve on.

For example, one recurring thing I see in private equity is how few people are good managers. I'll paste from another comment.

APAE:

The harsh assessment I make of most guys is that in that first post-MBA role where part of their job description includes overseeing (either directly or indirectly) people in a job they themselves had only two years ago, they resort to one of two extremes: either way too hands-on (over-managing) or hands-off (under-managing).

It's understandable. If you were a really good associate, you're now a VP, and the associate on your team is just failing to give you that last ten percent of output on work product that you're looking for, there are two easy defaults. Do the work yourself (leaving them with no developmental feedback on how they can improve for the future), or hound them until they get it right (micromanaging).

Further, most people lack the self-awareness to be critically reflective on developmental areas of their own, meaning John Q. Vice President isn't sitting down once he gets Principal to think about how he can be a better manager. If you didn't have it before, the chance you develop it later in your career gets increasingly smaller.

The transition from doer-of-work to part-doer/part-reviewer is really bumpy.

News flash: this is the real thing that people never clue into when they wonder where the soft-skills feedback they get as a PE associate comes from. It's the partners being indirect about saying the associate demonstrates no or too few indicators of being a good future manager.

News flash: Being a good manager is absolutely imperative to your success as an investment professional. It allows you to leverage your time effectively (delegating work components to more junior members of your team), streamline processes with service providers like counsel, bankers, and consultants to their peak efficiency (because you're managing the humans inside those service providers who interact with you on your deal), and also maximize what you get out of your portfolio executives.

This is just one example of failing to be self-aware. Others could be:

• monopolizing board meetings (droning on, because who'll stop you, you're the fund representative)
• talking at your portfolio executives, not with them (dictating what you want to see them do, failing to realize that they bring a wealth of knowledge you could never hope to have and thus missing the chance for them to tell you what they could use help with that would unlock way bigger improvements than whatever you thought up)
• not managing your physical health well (ignoring the proven connection between better physical fitness and better mental output)

- Character:

In the same comment I excerpted 'relatable' from, I also spoke about the idea of respectability.

We can think about this more broadly. Character matters. I love that quote we all heard some variant of as kids: "Character is what you are when no one is watching."

Think of everyone's complete disgust last year finding out Experian knew about the data breaches for several months before it came to light, and even then it came out from journalists, not the company. It wasn't even because their steps to resolve the issue required secrecy, but out of pure complacency or fear of the public backlash.

I can make it more personal. I mentioned a third guy in the comment I made on the "Burnout / Life Choices" post that seemed to resonate with so many people.

I will literally never do any kind of transaction with that guy. If he wanted to sell me a business, I wouldn't bother to do the diligence on it to even try to find whatever warts might exist, I'd pass. If he was on the board of a nonprofit, I don't want to be on that board.

Going further, I could have saved myself six months by throwing him a lower middle market deal I had equity in when a different friend decided to close his SPV and get liquidity. I went and found other potential acquirers to intro to the guy whose SPV I was in, one of which eventually closed the deal. That family of his classmate who funded his second and third deals will back him on just about anything. I don't care.

One, there isn't enough time in the world to diligence something thoroughly enough to satisfy yourself that someone with such a proven history of moral indigence hasn't buried a landmine somewhere that could hurt you. Two, you can't ever get insurance on reputational harm.

Character matters. I have seen people blithely choose not to do a deal with someone because of some personal data point they have on the guy.

"Oh, he reneged on so-and-so on the such-and-such deal, wasted everybody's time and ended up costing my buddy another $80 for having to extend the debt financing."

"Ah, not that guy. He lied about one of the guys in my fraternity cheating on his girlfriend just so he could score on the girl. I know him, it's a good shop but I'd hate to see you do a deal there."

"XXX Capital? Let's not do anything with them, they don't really take compliance seriously, I want to avoid a headache."

In order, those were a billionaire telling me about a fund I was thinking of selling something to, a megafund partner when I told him about a venture fund that put a term sheet down for a company I'm already in, and a PM at a credit hedge fund talking to me about another fund I thought we could sell an SPV to.

People do off-list references. They'll call and ask about you. They'll plug your name into LinkedIn and see who they know who knows you. Everything is a data point, and if you are character-poor, in the long run you'll find it harder to succeed because people won't want to do things with you.

- Vision:

Are you someone who operates reactively, or do you invest your own time studying the world to identify key things you think will happen in the short or medium term?

The former kind of person chases all the stuff people are talking about today. He can't be behind the curve. The latter is heads-down and ends up doing something that looks a little off-center right now, but at least he has the chance to be proven right in the future.

I'll excerpt again from another comment I made last month:

APAE:

Two: Sourcing

Here I'm going to pull almost verbatim from a prior comment I made years back.

Sourcing is the lifeblood of every senior investment professional. This is not a two-and-out program, you aren't the pre-MBA associate that 95% of all written material on the industry is tailored toward.

If you can't put high-caliber deals on the table, you won't ever get anything into the portfolio and thus you won't ever get paid.

People on forums like these (rightfully) talk down on associate roles at the shops where the primary component of the job description is sourcing. That makes some sense, because at the junior level you're looking to learn the quantitative elements of the deal process in order to develop the foundational skill-set that will serve you well as your career progresses.

Well, a private equity career progresses toward sourcing roles. In your case, you're in the first title where it starts to matter: Vice President, or depending on the firm, Senior Associate.

This means you need to begin building the muscle memory around identifying interesting investment opportunities, vetting them moderately, and bringing them to the table for discussion.

It's possible to write tomes on this, but for the sake of time, let's be brief.

You need to develop (a) theses and (b) mechanisms.

(a) You know from your prior role how imperative it is to have some research-driven convictions around how the world is unfolding. These evidence-based channels allow you to focus your time efficiently when studying your space.

e.g. "Moore's Law is under duress. The increasing player concentration and rising dollar cost of R&D in semiconductors, plus the key demand factors of automation, IoT, and cybersecurity, mean that the big guys are going to increasingly do inorganic R&D through acquisition."

(b) You need to develop repeatable phenomena that surface deals for you. Find a way to build mousetraps that churn out investment opportunities.

This may be a particular conference you decide you're going to own. You go the first year and meet a whole bunch of people. You stay on top of them well enough over phone and email in the intervening year, then ahead of the next conference, you line up your own private itinerary within the larger event.

Set up private breakfasts, lunches, and dinners off-site. Be the ringleader. Find some industry figures (non-deal professionals) whose voice would be valuable and get your firm to cover their ticket. Use these people as bait to dangle as your hook to get people to your mini-events. You can get existing acquaintances on board easily, and it's also a fantastic way to reach out cold to people you see in the attendee roster who you haven't met yet.

A couple grand on conference costs is a blip and should be easily approved by your firm, and you'd be surprised how many people will cover their own travel costs if they're being comped at a prominent conference plus invited to what looks like exclusive programming.

Maybe you develop a blog. This tends to be way more the domain of venture or growth equity guys, I haven't seen buyout guys do this (maybe that's your opportunity). This can be a way to discuss the developments you're seeing in deal structure, pricing, or traffic in focal sub-verticals.

You could do a podcast.

You could do a monthly professional development breakfast series where you invite more senior speakers to talk through a topic of their choice in soft skills.

Find a way to demonstrate and deliver value to a group of people. Tailor that value based on (i) the reputation you want to have and (ii) what you want to get out of them.

Want to get an early lead on the type of stuff that's widely trafficked? Get bankers and lawyers to think of you well.

Want to get founding CEOs of late-stage middle market technology companies in non-core geographies to call you impromptu to initiate a conversation about 'strategic options'? Well, you have to really differentiate yourself as someone who's cerebral, connected, compelling, and not-just-another-suit.

Your mileage is going to vary widely here based on what you're going after.

Hard skills.

- Negotiation:

Most people would put this under 'soft skills', but I'm putting it here because I think it's a skill where the outcome is measurable quantifiably.

You need to be a master at figuring out the optimum intersection of someone's willingness to give you a thing and your willingness to pay for it.

In private equity, this matters most in non-banked deals. If you're in a banked process, you have no real control over this. In non-trafficked deals, you can put down a 90-day standstill letter (moratorium) and give yourself calendar space to seal the deal. Now it's you versus the other guy, and outcomes in a vacuum can vary wildly.

Whether you pay 8x or 12x for the business is a function of your ability to read your counterpart, communicate effectively and winsomely, instill fear, prompt curiosity, barter across multiple points simultaneously, stitch together a final solution that incorporates everything accurately ... and do it all on a non-finite timeline.

This applies in reverse too. You can go get top-of-market pricing on a deal you want to exit by walking into someone's office, offering them a standstill letter, and telling them you can both save yourself a lot of grief by skipping a process and knocking the thing out together quickly.

- Process management:

This is a big differentiator. Everyone has their own respective hacks for keeping on top of things, but the majority of people cluster around the mean in terms of productivity output. If you're someone who can run one, two, three, X more processes in parallel than your competitors, well ... you're going to have exactly that much more to show for it at the end of the day.

In short, the guys who find ways to do more with their time get to do more in the same amount of time than their peers. Duh.

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This ran really long. I have stuff to get to. I hope this is helpful. Maybe I'll expand this into a thread of its own.