Private equity probes the minds of CEOs

Private equity probes the minds of CEOs


Jennifer Bollen


A few years ago, buyout firms may not have counted the psyches of chief executives and the hopes and dreams of finance directors among their biggest concerns, but members of the private equity industry are increasingly examining the minds of their management teams in the latest example of due diligence.
In a chat at an industry event yesterday evening with the sales director of a private equity-backed software provider, it emerged more buyout houses were performing psychoanalyses of the management of their investee companies – a practice more common in the corporate sector.
Over three days, a specialist due diligence provider called Highwire Consulting, which is dedicated to serving private equity firms, conducted lengthy and in-depth interviews and psychometric tests on the software company’s senior management. Questions included how the executive responded to specific work-related scenarios and how he viewed his relationships with his colleagues.
The sales director, who had never had a formal job interview throughout his career let alone a detailed examination of his personality and management style, described the process as unusual.
Once the interviews and tests were over, Highwire wrote a detailed report on its findings, which it handed to the private equity owner. The sales director and his team have never seen the report.
Among our huddle of PRs and a private equity adviser, no-one had heard of a buyout firm using such a service. But Sandra Aldridge, who founded Highwire in 2003, said the industry had grown more interested in the concept, particularly in the small to mid-market.
In fact, her clients include some of the UK’s most well-known firms – Lyceum Capital, which hired Highwire for its acquisition of sandwich retailer Eat in April, and Hermes Private Equity.
Aldridge said: “Largely because of the downturn, people are more cautious in their investments, banks are more cautious in their lending, people want to know they have the right people in their business. There has been more emphasis on their management side.”
John Dillon, a managing partner of Highwire client RJD Partners, said it was becoming more popular for firms to use specialist due diligence providers pre-investment.
Highwire offers its services for all stages of a deal but Aldridge said the most common time to carry out an assessment was before an acquisition.
The process entails a three-hour interview, psychometric testing and the gathering of character references from colleagues and business contacts. She added her team might observe a management meeting.
She said: “The more you can get under the skin of somebody and if you spend more time with them, the more you can understand where their capabilities lie. Everyone can tell you a story in half an hour.”
The executives are asked to tell stories about their successes, how they might develop the business, how they manag their teams and what motivates them. However, she said the questions do not relate to personal issues.
Aldrige said: “It is very probing around the business. We like to understand a little bit about what people like to do, what their ambitions are.”
Dillon said Highwire drew its conclusions from the big picture. He said: “There is no magic question, no Freudian stuff. They’re not trying to draw massive insights from a single question.”
Aldridge said the report was aimed at helping the company’s development and interviewees received feedback on their results. However, Dillon said RJD would not necessarily hand the full report to its portfolio management unless specifically asked.
So they don't have to be mad to work there but it helps? They'll probably never know.

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