Getting in touch with your inner GP

Private equity firms must now manage feelings as carefully as they do profits, writes communications expert Aaron Schoenherr.

Most workers and managers regard private equity buyouts with suspicion. Hostility, even. It’s probably inevitable, since private equity firms relish their roles as agents of change. And very few like change – particularly when it involves them. 

But this negative perception is forcing private equity firms to take a new, harder look at their communication strategy. They already possess the financial acumen, but now they’ve got to develop their people skills. In our work with various private equity firms, the question we address most often is: “How visible should my organization be among the various stakeholders within our portfolio companies?” 

The answer is likely to put most private equity executives well outside of their comfort zones, which is exactly where they likely need to be. To win over the companies they’re taking over, they must take a new, harder look at how they communicate with employees and deal with their emotions. 

Yes, emotions. 

Authenticity and empathy have become two key concepts that a private equity firm must now convey in their business plans, strategic planning and in their actions. As a result, they should treat culture as a key performance indicator and develop methods to measure their effectiveness and impact while communicating before, during and after a deal. 

Consider the results of a recent KPMG survey of 300 senior directors of private equity-owned organizations. KPMG said the respondents pointed to what it called the “seven deadly sins” of portfolio management:

1. Fail to win the hearts and minds of management.
2. Overwhelm management with interference.
3. Lose focus after the deal is done.
4. Manage by spreadsheet.
5. Turn deal over to portfolio management department.
6. Be a frustrated CEO.
7. Have unclear internal decision-making process.

The primary sin was largely a matter of communicating well and respecting people’s feelings. “The research reveals that private equity directors are generally highly regarded for their deal-making and financing skills,” KPMG reported. 

The problems cropped up when private equity firms set about addressing the employees of the firms that they’d acquired. The least effective private equity investors don’t engage managers. “The most effective,” KPMG wrote, “make a real effort to build a relationship of trust with management.”

And while bidding the highest price for a company is key, KPMG reported, the softer factors like personal chemistry can differentiate a private equity firm from the pack.

The successful private equity investors understand the importance of a company’s culture and know how to develop it. They may even take their foot off the gas pedal to allow time for cultural changes to take shape. They know that growth in revenue and cultural growth won’t always conveniently advance at the same rate. Yet both are essential to their investment’s success.

IQ, EQ and now CQ 

No wonder private equity investors are expected now to possess not only a strong intellectual and emotional IQ but also a cultural intelligence and empathy. 

Insight Labs, a nonprofit think tank that has worked with the Dalai Lama to determine how empathy can be taught in school curriculum, defines empathy as “an emotion that emerges from truly understanding another person.” It’s driven, the Labs says, by “an intensive experience of the other person.”

It can’t be faked. It must involve real time and dedication to understanding the company and its employees. Empathy is valued by those in leadership, as well as by those who are led. Private equity purchases affect people. If they’re treated like names in a spreadsheet, they’ll know it – and become combative. 

Authenticity and empathy have become two key concepts that a private equity firm must now convey in their business plans, strategic planning and in their actions

Kevin Kelly, chief executive of Heidrick & Struggles, a national executive search firm, has written about how companies went from looking for leaders with a high IQ to looking for those with high EQ, or emotional intelligence. 

Today, he says, his clients want leaders who also possess a high CQ, or cultural intelligence. He says cultural competency is the “new talent differentiator.” 

Going inside the Twinkies’ deal

When Hostess Brands, maker of Twinkies, filed for bankruptcy in 2012, it created a media frenzy. The lead bidder for Hostess’ cake brands finally emerged in January: Apollo Global Management and C. Dean Metropoulos & Co. and offered about $400 million for the venerable snack brand. 

The Apollo-Metropoulos team immediately communicated their goals of rejuvenating the popular brand. They told the brand’s customers and potential employees that there was more than money behind the deal – they possessed ideas for building the beloved company. 

C. Dean Metropoulos’ two sons, Daren and Evan, explained their plans in an interview with Time. They discussed why they’d purchased Twinkie and other out-of-fashion brands, like Chef Boyardee and Pabst Blue Ribbon. 

“They’re great iconic heritage brands that have intrinsic value,” explained Daren. “They just need a fresh perspective. They need reinvestments. What we’d like to do is create efficiencies in these companies and reinvest those profits back into product innovation, new marketing ideas, restructuring the sales force, making it a better company from all different angles and on all levels.” 

“Once these giant conglomerates get a hold of them, they become lost in the shuffle,” Evan added. “They become mismanaged because they don’t have entrepreneurs behind them pushing for results, pushing for innovation, for new products. They just become part of a larger investment scheme. So if we could get some individual brands away from some of these conglomerates, we could do miracles with them.”

In a single interview, the two brothers were able to turn the usual suspicion that employees have of private equity firms on its head. They weren’t raiders, they said. They were empathetic white knights, eager to repair problems caused by previous ownerships. 

They communicated empathy for the beleaguered Twinkie managers and employees, and showed an appreciation for its long-held culture and hard-won position in the marketplace. They displayed knowledge of the industry and an understanding of the market context and trends – key moves that the KPMG study suggests for private equity firms. 

The communication question

Let’s face it: Many private equity firms aren’t in it for the long haul. That’s not their business model. But this new approach by buyers like Metropoulos backs up KPMG’s findings on the importance of working with the board and management and being forward-facing within the company.

Culture, empathy and authenticity – these are communications tools. Strong communication eliminates many headaches in a merger or acquisition. And while this isn’t a comfortable space for private equity firms, it’s where they need to be challenging themselves to improve. 

Treat culture, empathy and authenticity as a part of your firm’s KPI. Define it, assess it and communicate each one as a priority. There is a reason that culture has become such a dominant concept and topic today. It’s because it has an impact on a company’s performance. Organizational health is a big deal in today’s company and can make or break it.

Those private equity firms that treat culture, empathy and authenticity as a KPI are the ones that will differentiate themselves from the pack and find greater success, and dare we say returns, in the long run.  

Aaron Schoenherr is a founding partner at Greentarget, a communications firm.