The Socially Conscious Private Equity Leader

The days of the ruthless ‘barbarian at the gate’ and unscrupulous “corporate raider” are being replaced with a more thoughtful, more sophisticated and more socially conscious investor. The proof points are seen in the ever-rising trends in environment, social and governance (ESG), impact, and socially responsible investing. Like most marked behavioural and cultural shifts, this trend is driven by both internal and external motivating factors. Pressure from limited partners (LPs), brand management and an increased chance of returns sit highly among these reasons.

However, it’s not enough to simply look the part of a socially conscious PE leader to reap the rewards. If PE firms want to seriously strike the balance between doing good and doing well, they’ll need to have these concerns entwined in how they operate, and they will need appropriate leadership in order to do so.

The limited partners push and social positioning

Broadly speaking, the move to socially conscious investments and practices in PE has been spurred by the requirements of limited partners. With monies from pension funds, universities, governments, etc, LPs are often representing the interests of average citizens. As such, these LPs need to be sure this money is being managed by people who have ethical standards that reflect those of their constituents.

This requires PE firms to consider the current social environment in which we live. Diversity and inclusion, environmental sustainability and labour practices take a more prominent position in the public consciousness than ever before. Much of this is reflected in the values of millennials, and research 1 has shown that millennials will spend more money on a product when it has social or environmental sustainability as part of its benefits.

This transition, coupled with the increasingly public interest in private funding means that equity investment is now a spectator sport where the audience can play a shaping role– with a rotation of its thumb or a click of its keyboard – in determining whether the leader has earned the right to continue his/ her quest. Companies with shaky diversity and inclusion practices, questionable environmental sustainability or unethical employee practices present a substantially riskier investment proposition.

One need look no further than the resignations of Miki Agrawal of Thinx fame or Adam Neumann, WeWork founder, to see this interaction effect. The public plays the role of moral arbiter. Or take the gig economy debate and the various companies which operate within it as an example. An attractive investment opportunity at first blush, but when public concerns around zero hours contracts and workers’ rights rise, valuations can tank.

Drive for value and drive for values

With all these factors considered, it’s clear why impact investing has risen to the fore in PE investment strategy. Many large PE firms have set up their own separate funds for impact investing. Bain Capital for instance has ‘Bain Double Impact’, focused on helping “mission-driven companies scale and drive meaningful change.” And, a whole new class of firm has emerged dedicated to positively changing the world. Harlem Capital is a NYC minority-owned firm whose focus is to “change the face of entrepreneurship by investing in 1000 diverse founders over the next 20 years”. And in the wake of its bold and purpose-driven mission it has attracted praise and support from the public, the media and large cap PE firms (e.g., KKR, TPG).

Ostensibly, this looks like a perfect scenario. Businesses, PE Firms, LPs and society at large benefit from this more conscious and responsible flow of money. However, this scenario can only be truly achieved if this social conscience is an inherent, inextricable part of a PE firm’s culture, rather than reflexive attempt to respond to an emerging zeitgeist. To fully realise the potential of impact investing, PE firms must shift not only where they deploy their money but also become more sophisticated in how they build an investment thesis that deeply connects to the psychology of all company constituents and the public. No small feat.

What leadership skills and culture change are needed?

If PE Firms are to see the double benefit of impact funds, leadership needs to be beyond reproach, and they must dually promote a drive for value and values. The DNA and mindset of PE cultures and their leaders must evolve in order to rise to the challenge of a rapidly changing landscape.

This mindset and cultural shift, like any other, is a leadership challenge. Our model of Inclusive Leadership highlights the keys to making the real difference. We have found that Inclusive Leaders focus on:

1. Curiosity – creating the conditions for learning, creative thinking, and openness to new ideas;

2. Courage – embracing the uncomfortable, taking risks, and empowering others; all crucial for leaders who will have to work to evolve a system that has historically produced great results in its previous mode of operating; and

3. Connection – deeply understanding self and others and building bridges for meaningful engagement; a nonnegotiable for investors to understand how to build a value-generating investment thesis that ignites public belief rather than ire

Our data shows that PE leaders score low on the 3Cs of the Inclusive Leadership model with a notable dip in Connection. This is not surprising given the rigid metrics that determine success or failure within the PE sector. Internal rate of return, and multiple of money will always have a high place on the agenda. However, in this brave new world of impact investment and heightened public scrutiny, leadership strategy and talent management approaches need to evolve to drive all the relevant success behaviours in its leaders.

PE has the opportunity to rewrite its own history. Once seen as a value destroyer, stripping companies of assets for profit, the stage is now set for it to balance driving value and driving values. PE leadership needs to deeply embed the values they seek to espouse and create a leadership culture that is open to ideas and investment not solely from a financial returns perspective.

Doing good and doing well are not mutually exclusive.