What investors worry about when assessing management teams
Catalysis has carried out tens of training sessions with private equity investment teams in recent years and we ask participants to answer a few questions to help us focus the topics we cover. Collectively, that adds up to 100s of reflections about the multi-dimensional issue of assessing management teams pre-deal and candidates for executive roles post-deal. We thought it might be interesting to synthesise answers to the six main questions and used our favourite AI platform (Claude) to help us. The answers below are unedited except for some minor clarifications.
1.Are there any assessment methods you have seen which were especially effective?
Referencing (especially unnamed/soft referencing)
External management due diligence
In-depth interviews and discussions
Psychometric testing/profiling
Observing management in action (e.g. during due diligence process)
Team assessments (e.g. interactions, dynamics)
Case studies/mock business plans
2. When things haven't gone well in assessing people, what has been the biggest area of weakness - with the benefit of hindsight?
Not enough time spent with management/rushed process
Ignoring red flags or gut feelings
Inadequate assessment of team dynamics/cultural fit
Overreliance on past experiences/CVs
Poor referencing or biased references
Not understanding true motivations/alignment
Lack of depth in assessing capabilities
3. Which issues around interviewing and referencing do you find most tricky to deal with?
Getting honest, unbiased references
Assessing cultural fit and team dynamics
Uncovering candidates' real weaknesses
Balancing relationship-building with critical assessment
Evaluating soft skills and leadership abilities
Time constraints in competitive processes
Assessing adaptability to new roles/situations
4. Do you prefer to use (or not) outside support for pre-deal management assessment? Why?
Most prefer using outside support
Main reasons: objectivity, expertise, ability to ask tough questions
Some prefer internal assessment for relationship reasons
Cost is a major factor, especially for smaller deals
5. What would make you hesitant in considering the use of a third-party alongside your own people and network (e.g. trust/relationship, cost, length of process)?
Cost (especially for smaller deals)
Impact on relationship with management
Length/intrusiveness of process
Trust in third party's capabilities
Value-add beyond own assessment
6. If you had one question you wanted answering in the training session, what would it be?
Best practices for effective management assessment
How to balance thoroughness with deal dynamics
Correlation between pre-deal assessments and investment outcomes
Most critical factors to evaluate in management teams
How to implement post-deal development based on assessments
We asked Claude to analyse comments by the size of transactions the private equity house typically pursues, and the main differences appear to be:
Smallcap firms are more cost-sensitive and often can't justify external support for smaller deals.
Lower mid-market and mid mid-market firms tend to use external support more frequently.
Smallcap firms rely more on internal assessment and referencing.
Lower mid-market and mid mid-market firms place more emphasis on team dynamics and organizational effectiveness.
All sizes struggle with balancing thorough assessment and maintaining positive relationships, but this seems more acute for Smallcap firms.
SOME REFLECTIONS
None of the conclusions are especially surprising but it is interesting to note:
The sense of dilemma between investors seeking necessary insights and worries about using up goodwill in doing so. In our view, that dilemma can be resolved and even turned into an advantage if team and organisation work is turned into a genuine value-add. But that does require work by investors and providers to frame the purpose of the exercise in developmental terms and shift language away from ‘management due diligence’. See further thoughts on that here: https://www.catalysis-advisory.com/blog/why-management-due-diligence-mdd-needed-to-evolve-into-team-and-organisation-strategy-and-beyond-zw9z6
Perceptions that deal team assessments of teams and third party work are substitutes for each other. In practice, the deal team needs to form an initial view of management well before any DD workstreams are initiated, and will likely oversee any actions on the board post-deal. So, this area is a core skill area for investors in all cases. On the other hand, third party input in this area – like for other DD streams – can be valuable where it allows initial impressions to be tested, widened (e.g. to second tier), deepened (to team and organisation issues) and turned into a roadmap.
One issue seems underplayed here, namely how investors – whether supported by third parties or not – can digest learnings about management (at individual, team, organisational and governance levels) and weave them into a coherent plan. We are big fans of pre-strategy workshops where due diligence outputs are digested, quick wins spotted, board roles clarified, themes for strategy sessions identified so that the early post-deal period is not dominated by the (mostly very mundane) 100 day plan list. You can find more thoughts on that here: https://www.catalysis-advisory.com/blog/how-can-activities-across-deal-cycle-be-value-adding-jf82p
PUNCHLINES
If your investment team could benefit from a (complimentary) training session then let us know and we can provide a list of topics both pre- and post-deal.
We are working hard to finalise an investor handbook providing advice on all the topics mentioned above and various other ones. More on that after the holidays…
