Why Private Equity Culture Matters To Limited Partners

Company culture is the visible manifestation of an organization’s ethics, integrity, and reliability. It’s important in every industry, but private equity culture is particularly impactful because building and maintaining trust is the foundation of our industry.

For Limited Partners (LPs) looking to invest with a General Partner (GP), a positive culture is also vital because it’s a good predictor of long-term financial success.

When an LP is trying to find the right GP, the requirement of a proven track record is obvious. But the importance of choosing a GP whose values align with yours isn’t as apparent. Investors need to do “cultural due diligence” on a firm in the same way that a GP would assess an operating company.

LPs should never place investments with a firm they can’t trust, no matter what the financial performance indicators look like. That’s true for many reasons, including that firms with poor culture are more likely to misrepresent financial reporting.

Let’s take a look at what culture is, and why private equity culture is important for LPs.

What is private equity culture?

According to Investopedia, corporate culture is “…the beliefs and behaviors that determine how a company’s employees and management interact and handle outside business transactions. Often, corporate culture is implied, not expressly defined, and develops organically over time from the cumulative traits of the people the company hires.”

Some people mistakenly think of culture as “the fun social things firms do” like team building and celebrations. Those activities definitely contribute to a company’s culture, but investors are more concerned with the underlying forces that drive how the organization interacts on a professional level, both internally and externally with partners, clients, etc.

Private equity culture as a driver of performance

LPs that are looking for a good place to invest will do well to put at least some importance on firm culture. Research shows that a good, strong culture is linked to better financial performance.

Firms with a positive culture are more likely to be strategically innovative. They embrace diversity in thought and problem-solving and are more willing to try new approaches rather than sticking with old processes simply because “this is how we’ve always done it.”

The ability to innovate in areas like business processes, communication, and how investment decisions are made are all examples of small, often culture-driven changes that can make a big difference. The benefit to LPs is that their investment is going into a firm that is forward-thinking—a common predictor of financial success.

Firms with a strong culture are also better at retaining top talent. Recruiters are constantly looking to “poach” the best employees by promising the next exciting and lucrative opportunity. Plus, talented employees are often tempted to strike out on their own and start a firm themselves.

The difficulty of fighting these forces increases substantially if working conditions in the office are less than ideal. Office politics, poor recruiting and management practices, and unfair promotion processes are all things that can drive good employees away—and with them, potential investors.

When a firm is able to retain its top talent through good corporate culture, LPs benefit significantly. Not only does the firm have the talent it needs to grow, but it also maintains the expertise necessary to make solid business decisions and nurture strong relationships.

Reduce fraud risk with positive firm culture

The dark side of firm culture is that a dysfunctional or toxic work environment has been associated with an increase in fraud. A Glassdoor study linked poor company culture to more deceptive financial reporting.

The report identifies two potential reasons for a negative culture leading to fraudulent outcomes. The first theory is that a company with poor culture tends to set unrealistic performance goals. The case of Wells Fargo employees opening fraudulent customer accounts is an example. Employees were under immense pressure to hit sales goals since compensation and career advancement were tied to those objectives.

This type of sales pressure isn’t unique to Wells Fargo, of course. But, the setting of unrealistic goals led to the de facto acceptance of unethical behavior. Salespeople believed they were more likely to get fired for not hitting their numbers than they were to get caught opening fraudulent accounts and fired for that.

The second theory is that firms with poor company culture lack sufficient “internal controls” to safeguard them from fraudulent behavior. In the absence of institutional controls, strong company culture that is focused on ethics and integrity acts as a safeguard. But in a company that starts to foster a “win at all costs” attitude, these safeguards quickly break down and ethics are tossed out the window.

Better culture, better business

Ultimately, a positive firm culture isn’t simply a “nice to have” attribute. It’s a driver of better relationships and a predictor of financial success that gives investors the confidence they need to take the next step.

Pro Tip: For General Partners, one of the best ways to develop investor trust today is with a secure LP-Portal. Altvia’s LP-Portal helps GPs achieve that goal by enabling fast and secure sharing of many types of files including documents, videos, audio files, and recorded webinars.

Schedule a demo to learn more about this product and how it contributes to a culture of transparency and attentiveness that stakeholders appreciate.

A traditional crm was built for general ‘customer’ scenarios

Software platforms have made the world a better place by making work a better place. Indeed the world is better off when people enjoy their jobs even marginally more, and workplace applications on big CRM platforms like Salesforce.com have done that and much more.

But the potential that platforms like these offer presents diminishing returns: once the platform provider has engineered too many industry specific components into its platform, its usefulness for other industries begins to be threatened, and with that so do the usefulness of the component tools built into the platform.

So it is with the CRM category that Salesforce.com has defined: it is generic enough to work for many industries, and yet still offers the potential for others to round off the edges and nail more vertically-oriented and extremely tailored software solutions.

Private capital markets are actually a great demonstration of this dynamic. Where generic CRM platforms simplify — appropriately so — to assume there’s a business, a customer, a sale, and service of that customer, there are a few industry-specific pieces that are missing.

Take for example, that investors become customers by investing through legal entities the GP raises. It’s a subtle but important nuance that just doesn’t make sense at a platform-as-a-service level (because it’s overly complicated for a simple one-time sale that many industries require), but which can easily be added without 10 years or software engineering. Once provided, the rest of the platform’s components become tremendously powerful again and you’re set to take over the world.

As a traditional CRM in our pillars methodology, these nuances must be present to properly account for investors in these legal entities, potential target companies and which are owned by these entities, the context of all interactions with these parties (as well as the appropriate overlap, ie co-investments), and how you’re arriving at finding these opportunities on both sides of the equation, such that you’re able to piece together what’s effective and what’s not. Not just because we say so, but because these are the very relationships and data that are key to the motivation behind a CRM in any industry.

It’s critical, too, that the valuable publicly-available information that helps to enrich CRM systems and save users painful steps of entering it themselves is fully-integrated at the platform level.

Again, look no further than the 3,000+ pre-built integrations that Salesforce.com — the creator of the CRM platform concept — has at a platform level to do so, and which only exists by way of holding just short of overly-specifying certain industry workflows that would present challenges to properly integrate.

Stakeholder reporting and communication (investor relations) draws on a range of datasets

The traditional “customer service” model of CRM systems once again makes overly-simplified assumptions about the customer relationship when applied to private capital markets.

In fifteen years I personally have yet to hear the terms “warranty” or “service call” in this market because it’s just not the same. But make no mistake, as uncomfortable as it may be to say aloud, customer service is more important now than ever and it’s constantly happening; the industry is, after all, considered to be a financial “service”.

As it turns out, that service is primarily information-based — it’s driven by data and takes the form of reports and analysis that drive decisions, and then end up again in investor-facing reports and analysis.

The foundational elements of a private capital markets CRM must be built such that they accommodate this data (like we discussed above), but so too that it can accommodate additional supporting data that investors (customers!) need in the context of service.

Oftentimes this supporting data — financial metrics and time-based values, for example — is believed not to meet the traditional definition of CRM and the natural thought is “well, better do this in Excel!”.

While I happen to believe Excel is still the greatest software application ever built, its introduction to this value chain we’ve discussed herein actually creates the problem many firms suffer from: key data needed to provide customer service (again: effectively the entirety of a firm’s reports and analysis) is now in disparate systems and detached.

Both of those dynamics are important and distinct: not only is this supplemental data disparate, but when brought together there is no logical association that can be made between the two data sets.

Allow me, then, to make the point very simply: not only can this financial and time-based value data (you may be thinking about is as “portfolio monitoring” or “accounting”) be a part of a CRM, it is arguably the most important part of a CRM because it’s at the core of what providing service to the customer entails — information that comes out of data!

Firms need a digital method to engage stakeholders (ie investor portals)

Investor portals are not new; in fact, for many of us — including myself — they conjure up horrifying nightmares in which we’re aimlessly guessing at folders to find the newest document we need.

So in lies the opportunity: not only have the portals we’ve come to hate not simplified the process of acquiring information, they’ve failed to create an entirely new experience that is “customer service” driven.

To be fair, this is not a B2C market where you’d be long out of business for not having focused on customer service and thus the customer’s technology-driven experience. But don’t expect to be around too much longer if you aren’t thinking about this shift.

Today’s institutional investors increasingly expect this same consumer-like experience, and a massive opportunity is being missed by not providing it. It’s not about providing them the experience they desire; it’s more about the ability to measure engagement that is had in return.

Put simply: what’s keeping the market from providing this experience is the availability of the information that’s required to create the service that provides the experience.

If you’ve hung in this long, you know that by focusing on your CRM, you have the data that’s required to manage the customer relationship and the technology-driven experience through which that information is shared to create a differentiated and opportunistic customer experience.