Teamwork in private equity: not always what you might expect

When private equity firms look to make acquisitions for their portfolio companies, they often assess potential targets through a standard organizational lens.

By Doug Hirschhorn, PhD, and Ben Lefkowitz

Hoosiers. We Are Marshall. Miracle. When people think of the most iconic sports teams in cinematic history, they generally picture team sports – like basketball, football, or hockey – in which the team is far greater than any individual player. Though the teams portrayed in the movies contain talented individual players, their success is inextricably linked to one powerful, almost magical source: team synergy. When team members find a way to unlock the strength of their combined individual potential, their teams are instantly propelled to awe-inspiring triumph. By highlighting team sport greatness, Hollywood inspires viewers to view collaboration as an unstoppable force.

Doug Hirschorn, DRD Advisors

Naturally, private equity firms want to create a similar dynamic for their investments. But it isn’t easy to do so, and the collaboration portrayed in the movies isn’t necessarily the best way to get there.

When private equity firms look to make acquisitions for their portfolio companies, they often assess potential targets through a standard organizational lens. Deal teams primarily look to see if target acquisitions have established themselves as industry leaders, hit their financial projections and been compliant with relevant laws and regulations.

However, successful cultural integration of two or more relatively large companies requires a proactive approach to human capital issues at the senior level. Much like sports teams, management teams are complex groups of skill players in different roles looking to help their teams achieve peak performance. For that reason, assessing teams through a sports team lens is an appropriate way for private equity firms to gauge the strengths, weaknesses, and interests of – and the compatibility between – their company leaders.

Soccer vs. track and field

The majority of organizations fall into one of two operational structures: the soccer team or the track and field team. In soccer team organizations, leaders are both functionally and cross-functionally collaborative, and they can see how their efforts impact the overall business. Metaphorically speaking, leaders work collectively to move the ball down the field so they can take shots and score goals. In track and field organizations, however, leaders collaborate less with other functional areas. These leaders wear jerseys with the same logo as their peers, but they largely perform independently.

Ben Lefkowitz, DRD Advisors

Deal teams may assume that the soccer team model is better but both operational structures can be effective.

Consider this hypothetical merger of two mid-market companies:

The portfolio company is a soccer team organization in which the CEO holds weekly management team meetings to maintain a culture of collaboration. Such meetings allow the CEO to inform department leaders how they each need to be contributing to the company’s larger strategy, helping them stay up to date on what other leaders are working on. Leaders are encouraged to interact on a regular basis, and this culture of collaboration enables the company to meet its financial projections and function smoothly.

The target company is a track and field team organization in which the management team operates in a more fragmented manner. Leaders work diligently in their areas of expertise and trust that their colleagues are doing the same in other domains. Viewing constant collaboration as unnecessary and even unmotivating, department leaders have each independently thrived in this operational structure. Like the soccer team organization, the company has emerged as an industry leader, placing it on the radar of the private equity firm deal team.

Following standard diligence, the deal team determines that acquiring the target is an attractive growth opportunity and moves forward with the transaction. The deal team and portfolio company management team then insist that the target’s department leaders assimilate to the soccer team culture. It doesn’t occur to them that these leaders would struggle to work within what has been such an effective operating structure.

Unfortunately, the target’s department leaders are overwhelmed by the substantial emphasis on meetings and collaboration, and they yearn for their previous culture of independence and autonomy. As a result, the combined management team becomes dysfunctional, jeopardizing the success of the acquisition.

This hypothetical scenario has occurred many times. It demonstrates that what works for one organization doesn’t necessarily work for another – and that bringing the two together can expose serious incompatibility. To ensure a harmonious integration and a successful add-on acquisition, private equity deal teams need to make considerable effort to fully understand the cultural models of both their existing portfolio companies and their targets. And only with that understanding can deal teams find ways to maintain and blend important cultural elements of both companies.

Though a sports team lens is vulnerable to nuance, it is a thought-provoking framework through which deal teams can address the cultures under which their leaders thrive. By doing so, deal teams can create the team success depicted in the movies for their investments, but the magic of collaboration isn’t necessarily what drives it.

Doug Hirschhorn, PhD, is CEO, and Ben Lefkowitz is senior associate of DRD Advisors, a boutique leadership advisory firm that specializes in assessing and developing private equity-backed management teams.