Getting the right mix

EVERY PRIVATE equity investor will tell you that the dynamics of a management team – how they actually get on with each other – is critical to an investment’s success. Although most mid-market private equity investors would say they “back management”, few investors systematically assess, account for or manage team dynamics, which seems like a missed opportunity to add value.

Team dynamics can typically involve processes of communication, decision-making, leadership and sharing of power and can strongly influence how a team operates. Several studies document a strong link between top management group dynamics and organisational performance. For example, a study at London Business School found that management teams assessed as more flexible, optimistic, and cohesive, and associated with responsible risk taking, had generated 15 per cent higher income.

Effective team dynamics need not necessarily mean rosy relationships throughout the team. Indeed, research shows that stimulating, constructive conflict can enhance group functioning and organisational performance. Avoiding or suppressing conflict may result in lower individual creativity, poorer communication and weaker decision making.

However, team dynamics are not just about getting along with one another. To operate most effectively, individuals must exhibit a complementary mix of skills, values and experiences that reinforce the strategy for the business and that can be identified at the outset of a deal through rigorous assessment. It is crucial that there are no capability gaps in the team.

Heterogeneous teams, which consist of managers with varying backgrounds, skills, experiences and competences, are better suited to organisational dynamism and environmental complexity. One reason for this is that diversity equips management with different types of knowledge, styles and professional perspectives. When assessing team dynamics, the objective is to ensure that these capabilities complement, rather than overlap.

In our experience, private equity backed management teams perform significantly better if they display meta-team qualities such as the ability to make decisions, adjust to new ownership structures, and set up and operate within new governance structures.

As time is often of the essence, governance, decision-making frameworks and infrastructure need to be set up as early in the deal cycle as possible so the team can focus on moving the business forward, post deal closure.

Investors will most certainly have an exit in mind and are aware that the strength of management can significantly influence the value realised at exit. It is not uncommon for some members of the top management team to leave the business at the time of exit and therefore, the team must invest in developing the skills, capabilities and dynamics of the second and third levels of the organisation.

Of course, the dynamics of management teams can be deeply affected by particular changes and challenges the business is facing. Having worked with 30 private equity backed management teams over the past two years we have come across some challenges that arise more than others.

One particular challenge occurs when the founder transitions out of a founder-led business. The remaining team must ensure they are able to gain the maximum possible value from the founder and retain the essence and culture of the business, whilesimultaneously professionalising and scaling the management structures.

Another challenge arises in buy-in scenarios where new individuals are integrated into an existing team. It is essential that there is a cultural, value and personality fit along with the setting of comparable expectations at an early stage. For example, we experienced one scenario where a blue chip buy-in candidate looked highly experienced on paper, but then struggled to adapt to a new small business culture.

A third challenge we come across is when individuals are forced to operate with significant ‘gaps’ in the team where other team members have either moved on or are underperforming.

We have also worked to help improve the dynamics between investors and management teams. It is very important for both parties to clarify expectations from the outset and forge a relationship where the investor does not pester or impose, but is proactive in helping the management team figure out how and where they can add value.

The importance of teams working cohesively and effectively together should not be underestimated when it comes to value creation. Although team dynamics do not appear on the balance sheet, they are invariably closely linked to business outcomes.

Talia Litman is a consultant at leadership consultancy Tyler Mangan