In good times and bad, the top private equity firms have outperformed most businesses over the past thirty years – even after the financial crisis. The PE space stays one of the best places to appreciate the workings of the financial-economic world.
I asked Anuradha Raja former Executive Director Australia for L Capital Asia to reflect on her experience in working in the private equity space and the life lessons she has drawn from it. For the past eleven years, she has analysed a broad spectrum of sectors (from water treatment to diamond jewellery), led different roles (from PE fund–raising to exiting majority holdings to setting up two offices) and invested with wide range of stake-sizes (from growth-minority to buyouts).
Lesson #1- The key asset is people. Train yourself to see them in temporal dimensions.
Private Equity sets itself a task of delivering superior value in three to five years (usually) of holding a company. Broken down for simplicity, PE returns are driven mainly by three key numbers — (1) revenue growth (2) profit margin expansion, and (3) valuation multiple improvement/ company’s perception improvement during the holding period. In case of levered deals, a fourth number (4) is the leverage kicker.
Given this context, as one evaluates companies for investments, one looks at a lot of quantitative and qualitative details, however, the key asset that colours all in its own shade is the people driving the business. But how does one evaluate people? People are highly dynamic variables - they are open to influence.
One thing Anuradha has learned over time, is to try to look at people in more dimensions. Not as static flat points, or as what you see when you meet them, but say, vector-like, with more dimensions, lines in space, travelling at their own speed on different paths and planes, which have come together on the same plane (in this case, the company), intersecting courses for a limited duration of time. Two CEO candidates may offer similar capabilities, but what helps to understand is what got them there, their speed, their direction. This then nudges you towards the better decision.
By trying to understand the world-view of all the people you meet, you develop an understanding of their reasons, their drives and objectives, their fears, and you empathise better. Then when you meet, you are more likely to arrive at a win-win outcome.
Lesson #2 — Choose deep over shallow. Long-term over short-term.
One of the things about most choices, decisions and investments in private equity is that you live with them for a longer period compared to other roles. In PE the average decision or investment takes longer to bear fruit than other roles and you get a true appreciation of the longer term (longer than a year). Not at the cost of the short term, but long term over short term.
The C-suite’s world can sometimes move from quarter to quarter, and big steps which might have a negative short-term impact require a lot of explaining and perception management - still, the market may unfairly penalise those decisions. On the other hand, most of private equity action happens out of the public eye; one is spared the pressure of mark-to-market. You try to make choices and take actions that secure a positive long-term outcome. The reason to do that is that when you exit, you need to show the future value to next round of investors, be it the public markets or a strategic investor or another PE fund.
Sometimes, this can be at odds between management and owners if the time-period they each consider is different. Part of this conflict is addressed by building healthy long-term incentives for the management team, to align everyone towards building value over the longer term.
Once you embrace the long-term perspective, it is easier to cut out a lot of noise. Do not sweat the small stuff, but think centre, think calm, and you’ll do justice to yourself and those around you. A quarter does not amount to much when you consider a life-time, for yourself or for a company, so choose wisely.
Lesson #3 — Be a Student of the Game.
In PE, one is expected to be a perpetual student of the game, each transaction and its sub-texts are different, it is always new. Many people are expected to become experts quickly in their daily jobs. It becomes critical skill in PE given that one learns from the founders and the management and then one negotiates with the very same people to buy their companies or become their partners. One is to then take decisions that set the course of the company for the future. To fare well in such scenarios, it becomes crucial that you bring your humble self to the table to ask questions and learn from the experts, from their achievements as well as their mistakes.
Another way to consider this, is that not everything always goes as planned. Despite all effort, one might end up with a bad investment. The ability to deal with it and find your own answers — whether persistence will pay off in that particular case or whether you are better off cutting your losses, is a call you take, and you learn as you educate yourself on the potential scenarios. The ability to begin anew often, holds one in good stead.
Value those highly, who bring with them the right attitude to deal with new situations, the ones with rigour and high intellectually curiosity. This stays a pursuit. Training oneself and the people around to be a student of the game. Appreciating that there is a universe out there and the more you learn, the more you realise your own ignorance. This thinking helps when you build your team. This helps when you evaluate company cultures for investment. And this stays as a lesson you would like to pass on to your child.
Lesson #4 — Ask often, “What is the Objective?”
What is the point of everything in private equity? The primary objective for investors putting in money in PE stays the pursuit of superior returns by allowing capital to be matched with deserving private companies.
You evaluate hundreds of opportunities and pick a few for investment. Each company is wonderful in its own way, but one is looking for the best match — companies that can deliver returns in the available time frame. Even though similar on surface, companies can be vastly different in terms of growth opportunities.
Choosing one from scores of opportunities is difficult. And it is easy to get pulled into deal fervour. Saying no all the time and getting no deal done clearly does not have the closure that a closed deal brings. Often then, people start mistaking getting a deal done as the objective. But it is not. Deal frenzy happens because people ignore the core objective.
The objective is to deliver superior returns, and you do so by picking superior companies, not just by doing deals. Getting this objective built in the filter allows you to prioritise and guides decision making. You learn to say no. You do not get pulled in doing deals for the sake of deals. You learn to think of exit before investment. And the objective becomes the guiding principle.
Lesson #5– Learn to see the wood and the trees in the same frame.
They say that what one sees is a construction of reality by the brain. Eyes see something and then brain fills in the rest on the patchwork of images to give you a consistent, continuous image of the world. It constructs reality with the available materials. Can we then say that if you could feed it more, views from multiple perspectives and vantage points, then what you see can be drawn, redrawn and coloured better and more accurately. By using two different points, you can triangulate the third.
Most roles in PE, from analyst to partner, require one core repetitive action — the eventual build-up to a call to be taken on any opportunity. There are a lot of approaches, a lot of numbers to be pondered over. Lots of assumptions about future of different things to be taken. It is easy to get bogged down by detail. But by allowing yourself the ability to zoom out, and get a bird’s eye view of the landscape, you can dive back in at the right spot. And you bring objectivity to the analysis. Seeing more intensely might be seeing more.
To know what you do not know. To accept contrasting viewpoints. To play with conflicting ideas in your head. Sometimes, it is about understanding that things can have two states at the same time. To look at both sides of the coin in the same view. As in PE, so in life. Training yourself to look for better perspectives, while appreciating the depth of field with a clear understanding of details allows you to perceive a more accurate reality.
If you are an executive currently seeking a career in private equity, Allura Partners can assist. For a confidential conversation please contact Adrian Belle, Managing Director on +61 2 8821 7301 or visit www.allurapartners.com.au and for Anuradha’s full article, visit https://medium.com/@anuradharaja/life-lessons-from-private-equity-7b82cac44c76