December 1, 2017
Interviewed by: Privcap
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The Importance of Team Cohesion

Investors carefully consider the team dynamics of a private equity GP, say three veterans of the fundraising market. They will notice if a single person dominates a pitch meeting, and worry if the economics and decision making process seem skewed. Plus – they are more interested in sector expertise than proprietary deal sourcing claims.
Investors carefully consider the team dynamics of a private equity GP, say three veterans of the fundraising market. They will notice if a single person dominates a pitch meeting, and worry if the economics and decision making process seem skewed. Plus – they are more interested in sector expertise than proprietary deal sourcing claims.

The Importance of Team Cohesion

David Snow, Privcap:

Today, we’re joined by Katie Stokel of Abbott Capital, Mike Elio of StepStone Group and David Conrod of FocusPoint Private Capital Group. Everyone, welcome to Privcap today. Thanks for being here.

Let’s get into a topic that maybe is a bit less scientific, a bit more anecdotal, which is the team dynamic. Private equity firms are organizations where people have to make the right decision together. What are some of the indications that a team is working? This could be either a brand-new firm or a firm that is on fund 10. What are signs that the team dynamic is working?

Katie Stokel, Abbott Capital:

Obviously, you want the rewards to go with the people who’ve created the record, so that would obviously be the classic thing to look for. How’s the carry divided? Who owns the management company?

People come into our office and there’s one person who just dominates the conversation, and we spend two or three hours with the team and 90% of the talking is done by one person. That’s a classic sign that something’s not working.

Snow: That’s not recommended in a fundraising meeting, correct, David?

David Conrod, FocusPoint Private Capital Group:

No.

Stokel: That happens—all the agents sitting there tearing their hair out.

Mike Elio, StepStone:

It’s the quantitative and the qualitative. The quantitative—we’ve mentioned some alignment of interest, economics, turnover, all those things that you look at. It’s the qualitative that I think general partners do not put enough weight into. The due diligence on site is incredibly powerful in assessing a manager.

When we sit there across from you and ask you a lot of questions, it’s not the content of the answer. Chances are, we probably already know the answer because you gave us our 300-page due-diligence questionnaire. It’s how you deliver the message and how you as a team deliver the message. We talk to the senior people, the mid-level people, we talk to different parts of the organization, and how that is delivered is incredibly powerful and, quite frankly, incredibly revealing.

I was at one due-diligence on site last year, and you could tell there was one dominant person in the room and there was obviously a mid-level person who had his one slide he had to present and, I’ll tell you, he was sweating bullets. He looked so nervous like his life depended on it. He got to his slide and of course, the dominating person in the room looked at him [as if to say], “If you mess this up, you are dead to me.” Quite frankly, that says a lot about team dynamic, right?

Snow: If you’re an earlier-stage firm or newer firm, do you care a lot about who’s finding the deals versus who’s working with the portfolio companies afterwards or at the smaller end of the market. Does it all just kind of bleed together?

Elio: The smaller the firm, the more it does bleed together. That said, even the smaller firms are having operating advisors. Maybe it’s not a formal operating group, but they’re pulling together folks they know in the sector that are specialists to help them. Deal guys are delay guys and they like to do deals; they don’t always like to operate a company or do the improvement.

Conrod: One observation that we’ve seen recently, that we’ve picked up, is that the model of sourcing where a firm might have a bunch of young guys out of business school banging the phones looking at deals—that’s becoming an obsolete model because of the internet.

You don’t need the army, I think, that you used to. This is where having… people with an operating background are helpful because they may, in some cases, have better judgment because they’re more knowledgeable about a specific sector that you’re going into. I think sourcing now, you can be much more targeted and focused using technology to get to those companies, because any company that’s worth investing in or getting to know is probably on the web and you can find it. You can find out a lot of information about that company.

Stokel: Everything’s shop these days—we know that. GPs know that and they know we know that, and they don’t even try to tell us the proprietary deal flow, but they do. And some of the better ones do show ways that they maybe monitor companies over six or 10 years even and develop relationships that, when it becomes an auction, at least they may have an inside relationship that may help them get the final look.

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