No matter how stellar the private equity (PE) firm, success depends on getting portfolio company management teams to deliver what they sign up to deliver. It is critical for investors to do periodic health checks on their relationship with management teams. Is the partnership working well enough for investors to influence management teams? Why are there disconnects between investors’ strategic insights and on-the-ground execution?
It comes down to commitment. A compelling study cited in Robert Cialdini’s classic Influence: The Psychology of Persuasion highlights the importance: “Thirty seconds before putting down their money, racetrack bettors had been tentative and uncertain; thirty seconds after the deed, they were significantly more optimistic and self-assured. The act of making a final decision had been the critical factor.” People want to be clear with their commitments. And this principle is a powerful motivator for teams and individuals with an unmistakable implication for PE: a fully on-board management team is nonnegotiable.
In our years working with investors to both diligence and develop senior teams, we have found two key levers drive how well investors influence and engender commitment:
Strategic Alignment: Ambiguity hinders growth. Management teams function best when they understand what to do and when, but also why they are doing it. Clarity on the investment thesis, roadmap of initiatives, and current priorities is a must.
Case in point | The state of affairs at a services company highlights the danger: after changing hands to a new investor, the management team was unclear as to the top growth drivers. In the absence of a north star strategy, each leader retreated to their individual silos and fought the fire of the day. Based on Ampersand’s findings, the new investors accelerated work defining strategy and started building a PMO to improve focus and cross-functional collaboration.
Case in point | Sometimes, though, strategic alignment requires more drastic actions. For example, one PE firm changed its standard partnership approach after enlisting Ampersand to diligence the management team coming with a medical device carve out. Scarred from years of receiving directives from corporate with no accompanying resources, the management team had no playbook for partnership. Investors spent more time up front to establish the rules of engagement and then installed an interim CEO to get the team operating at a faster pace.
Culture: How you communicate is as important as what you say. The approach and delivery send a cultural signal; intentionally setting the right tone primes the organization to accept the message while also building trust.
Case in point | Despite years of growth, one of our technology clients had a culture issue eroding both the management team and broader organization’s excitement about the new owners: the CEO insisted all previous investor communication come through him, which he then shared only sparingly with the management team and employees. Questions were not well received, especially if they were challenging. The new sponsors held a town hall with everyone, including a lengthy Q&A section, as a symbol that the next chapter would be different with open two-way dialogue.
As with any relationship, there’s never a bad time to check in and get on the same page. Reset the psychological contract, bolster commitment, and accelerate results by uncovering any misalignment and carefully considering culture and context before proposing a path forward.
