I am an avid alpine sports enthusiast, and I've discovered that effective leadership is a lot like downhill skiing or snowboarding. Those that lack confidence become stiff-legged and attempt to control their descent by rigidly extending their downhill leg to scrape snow in an effort to lose speed. One of the consequences is that their bodyweight leans away from the fall line (uphill), and this often results in skis losing contact with the snow, a loss of control, GAINING speed, and an inevitable crash. Successful skiing and snowboarding, however, requires fluid and flexible leg movements, allowing you to move fluidly in and out of each turn. This keeps your equipment on the snow and actually facilitates control. Skiing freely without fear of failure is what makes this possible. Of course, these principles don't apply if you've never skied or snowboarded before; some level of experience and training is fundamental. This is no different than leading a business, however. Leaders hired by private equity firms to run companies should always have a resume which qualifies them for the job. Unfortunately, while relevant experience is necessary, it is not sufficient to ensure success.
Private equity-backed companies are unique relative to their non-sponsored counterparts in several important ways. First, there is time pressure. Value creation generally needs to transpire over an approximate five-year horizon from the date of the original investment, and leaders don’t always join the business up front. Second, top quartile returns are needed to perpetuate investor interest in future funds raised by the private equity sponsor; investor interest is the life blood of any private equity business. Generating top quartile returns typically requires some combination of outsized growth and balance sheet leverage. When you combine all these factors, it requires quick, calculated, and confident risk-taking at speed. It is not for leaders with a weak stomach!
However, with great risks come great rewards. Gains in equity value are normally shared with executive leadership. These paydays can be life changing and are typically not obtainable in comparable leadership roles outside of private equity. Further, once a leader has demonstrated an aptitude for succeeding in a private equity partnership, they become a hot commodity. It is not at all uncommon to find executives that have completed multiple tours of duty as private equity-backed leaders. It can be thrilling, addictive, and lucrative.
The best leaders I have observed are driven to succeed, but not driven to garner the approval of others. Analogies from life abound: karaoke, dancing, dating, etc. In each of these contexts, confidence fundamentally affects performance. It is about being comfortable with who you are and what you have to offer. It is different than being cocky or reckless; it is being loose. Typically, this confidence comes with age and achievement. Eventually, a leader gets to a point where they know what they can do, and they no longer need the affirmation of others. They can make decisions, take risks, provide feedback, and confront adversity with fluidity and flexibility. This, in turn, inspires confidence and followership. These leaders are not afraid to fail, and this becomes a superpower. Finding a leader for your organization that has the requisite experience AND possesses this X-factor is like having Tyreek Hill or Christian McCaffrey on your fantasy football team – your chances of winning go way up!
New Harbor Capital invests in smaller, growth-oriented, healthcare, education, and tech-enabled services companies in the lower middle market. Drafting proven superstars like Hill or McCaffery is not always a luxury we can afford or have access to. Consequently, having the ability to spot these unique individuals when there is typically less evidence of prior success becomes a core competitive advantage in our segment of the private equity market. It is deeply satisfying to see a less established leader gain the confidence and freedom needed to flourish. Success for us is achieved by supporting these leaders with the tools and resources needed to capitalize on opportunity and thrive in the face of challenges. Business and investment success is simply a byproduct. It is a thrill to help a leader take flight and realize their full potential. It never gets old.
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