The Need for Diversity in Private Equity
Updated: Apr 2
By Tilde Höjer, Senior Research Analyst at KPEC
At first glance, one may suggest that the dynamic nature of the private equity industry seems only to be characterized by changes in the types of entity investment trends, such as the recent growth in impact investing and technology. However, the transformation of the business core concerning management diversity represents another valuable determining factor in the sustained success of many PE firms in the upcoming future.
The Current Leadership Style
Leadership is the social process of influencing others to inspire and maximize the efforts of others to achieve a goal. Categorizing leadership styles can be done in several different manners. One of the most commonly used categorization tools is the eight leadership archetypes developed by Kets de Vries (development professor at INSEAD). These archetypes include the energizer, collaborator, pilot, forecaster, provider, harmonizer, composer, and producer. Whilst it is difficult to compose a leadership team that incorporates all eight archetypes, it can be assumed that firms with greater archetype variety are at lower risk of insular-thinking and homogenous decision-making abilities. This can thereby potentially stimulate superior investment decisions. Although the success of the current PE firms is undeniably laudable, an analysis of the leadership style within most of the firms raises questions. According to a study conducted on the current senior leaders within the European PE industry, only two of the eight leadership archetypes are prominent. The study concluded that approximately two-thirds of the firms principally rely on forecaster and/or pilot leadership styles. Both leadership styles provide a multitude of advantages to the firms. Pilot leaders contribute with strong strategic management skills and are visionary individuals who are comfortable with ambiguity. The forecaster is deeply knowledgeable, visionary and learning-oriented. Both archetypes represent essential skills for thriving within the PE sector.
Source: BespokeHR, 2017
Nonetheless, the lack of heterogeneity present in the leadership style puts the sector at high risk of inhibiting the innovation necessary to attract the bright new generation. The urgency to fulfil the blindspots in leadership in the PE sector will continue to grow as the competitive nature continues to flourish. The advantages of pilot and forecasting leadership may be outweighed by the slowed-down decision-making abilities as a result of biased analysis, making cautious judgments, and/or remaining too comfortable in familiar environments hindering the ability to move into unfamiliar territory.
The leaders needed for the next decade in PE, one which is marked by fast-changing and demanding environments, need to exhibit all eight archetypes. The pressure on the PE sector will increase for firms of all market positions. Especially on smaller companies, they will need to demonstrate high specialization and diversity to win a differentiated market position. Larger players such as Blackstone will need to develop new leadership styles to protect growth, and they will need to diversify across unfamiliar industries and asset classes.
For this to occur, the leaders will be forced to adopt a critical approach to their way of leading the firms. The previously desired hard skills sought after in leaders, such as analytical and accounting skills, will gradually be replaced by or are needed in more balanced combinations with soft skills. Leaders exhibiting soft skill contribute energy, compassion, emotional connections, and flexibility to a firm and its business activities.
Yet the question remains; what will leaders of the PE sector need to focus on in the upcoming years? Leaders should avoid applying a uniform leadership style, "cookie-cutter leadership", and instead focus on situational leadership in order to embrace changes and recognize opportunities. Furthermore, they should strive to recognize the value in people management as the root of investment success. Lastly, they need to put collaboration, flatter hierarchy, and diversity at the heart of the firm's operations.
Source: BCG, 2018
Recently, the bias rooted in the traditional recruitment principles which dominate the private equity industry has been criticized. Although recruiting based on hiring and promoting those who are "just like us" remains prevalent within the industry, firms are gradually starting to recognize the value which diverse management teams hold. This has resulted in the sense of urgency to replace the outperformed homogenous management teams to redefine the industry for the new generations. Traditionally, consultancies, investment banks, and PE firms have remained amongst the most desired workplaces for strong hires. However, in the present and future times, the rapid growth of start-ups and the attractiveness of the digital skills & technology industry have escalated the intense sectoral competition in attracting promising employees and leaders. In what ways will the firms need to diversify to sustain their success?
An emphasis on diversity in terms of expertise, experiences, age, and gender will be essential in aiding identification and appraisal investment decisions and business activity proposals. Thereby, the PE management team will have wider access to a multitude of content expertise and diverse perspectives. Furthermore, diversity enables firms to improve communication quality and develop greater team engagement.
Harnessing the power of diversity in both PE leadership styles and team management constitutes firms gain a competitive edge. The additional advantage of diversity is that it will foster sustained growth as diversified viewpoints will move firms into unfamiliar territory, pushing boundaries of innovative success. Diversity will drive innovation, and innovation will drive diversity.
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