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Leadership Due Diligence in Private Equity: Should You Trust Your Gut?

Today’s private equity firms are facing internal market pressures including competitive bidding and investments that require operational improvements. In this environment, using a “trust your gut” tactic to place bets on a prospective portfolio company’s leadership can be risky. Our guest writer Victoria Swisher breaks it down.

Most due diligence checklists include categories like: financials, taxes, intellectual property, contracts, etc. But what’s often underrepresented is anything to “check” about the leadership of the company that’s in play. Sure, sometimes a checklist will include a Management Personnel category, but these usually list things like tenure, age, position — qualities that seem more like name, rank, and serial number than any true value-add.

Why such a de-emphasis on vetting a prospect’s leaders? It could be that management and leadership assets have been harder to quantify, especially when the question is, “Do we have the right players to deliver on the investment?” It’s tempting for private equity investors to rely on their instincts when making judgment calls about the ability of a company’s leaders to execute on the strategy and yield a strong return. But in a PE-backed company where complexity, ambiguity, and fast-paced execution are expected, success often means shedding the established ways of doing things..

How do you know your executive team has the qualities to adapt and learn, and ultimately succeed in an ever-changing market?

Learning Agility Key to Corporate Reinvention

When you think of a leader’s potential to perform in new, ambiguous situations, what they’ve accomplished in the past isn’t as important as how effectively they will be able to perform when confronted with unforeseen circumstances, crises, and complex problems.

That’s where the concept of learning agility can make a difference. Learning agility has quickly emerged as the most valid and reliable predictor of high potential leaders and executive success today (more important, even, than IQ, emotional intelligence, or education level). Why? People who are learning agile gain new skills more readily and carry those skills forward to perform successfully in a diverse mix of situations.

It’s estimated that just 15 percent of the global workforce are highly agile learners, so securing this kind of talent is becoming an important strategic differentiator for businesses. In fact, close to 25 percent of the Fortune 100 use learning agility as a means to assess leadership potential of internal and external candidates.

Learning Agility in Action

So what do agile learners do differently that helps them succeed as leaders? They seek out challenges and usually will figure out a way, through resourcefulness and pulling the right people together, to get even the toughest assignments done.

Highly curious, the learning agile leader is skilled at managing conflict, and actively seeks feedback. When you’re around these people, you know it. They’re the ones in meetings or problem-solving huddles who will say things like: “Another way to look at this is…”, “Why can’t it be done?”, “What resources do we need to make this happen?” Interpersonally, they can be heard to say, “I wonder how I might have handled that situation differently?” or, “Let me see if I understand your position.”

A learning agile leader’s path to success is no accident. A common theme in the research on why some executives succeed and some derail is the extent to which the individuals seek out diverse experiences and amass multiple lessons from them. These lessons manifest as varied and expansive ways of looking at problems and coming up with creative solutions.

The executives that derailed became so dependent upon their past, favorite solutions that they stopped trying to gain new skills and explore new ways to solve problems. They eventually ended up trying to apply that “tried-and-true solution” to a situation that didn’t fit… and they failed. For proof, look no further than Lehman Brothers.

Having high learning agility especially comes into play with transitions—from the known to the unknown. When faced with a novel, unfamiliar situation, defaulting to existing behaviors or favorite problem-solving tactics may be disastrous. Those high in learning agility find new ways of coping with those unforeseen problems and opportunities.

Identifying Learning Agile Leaders

So how do you determine if you’re placing your bets on the right leadership staff to deliver on expected performance for your investment? Here are five areas to assess to determine an individual’s learning agility:

Mental Agility — How comfortable are they in dealing with complexity?
People Agility — Are they skilled communicators who can work with diverse people?
Change Agility — Do they like to experiment? Are they comfortable with change?
Results Agility — Can they deliver results in first-time situations?
Self-Awareness — Do they recognize their own strengths and weaknesses?

When it comes to introducing management assessment into the due diligence process, the old adage “timing is everything” applies. Early in the process, you need to partner with the company’s incumbent leaders to get them onboard to seal the deal. The last thing you want is to raise the specter of a test they’ll be subjected to. With this in mind, it may be best to bring measurement into the equation when there is an agreement to acquire. Positioning the idea of “assessment” in a developmental context will also help.

With fewer and fewer levers to pull for private equity firms to distinguish themselves from the competitive pack, relying on a “trust your gut” approach for leadership due diligence simply won’t cut it anymore. By assessing learning agility, you can ensure you have the right leaders — leaders who can adapt to change, address the unexpected and motivate and inspire those around them. For private equity partners, these agile learners can unlock the true value of an enterprise and drive success.

Vicki Swisher is a Senior Director, Intellectual Property Development, Korn/Ferry International. Opinions expressed here are entirely her own.

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