How Resilience Supports PE Success
As we navigate further into our "Breaking into Private Equity: A Veteran's Guide" series, this week spotlights a vital yet often understated skillset in the world of private equity: Resilience. I had the opportunity to sit down with Paul Swaney, Swaney Group Founder, to explore the parallels between military-honed resilience and crisis management skills and their transformative effects in private equity.
Paul, unpacks how these battle-tested attributes equip veterans for the rigors of PE investments, driving success through turbulent markets and complex deal-making scenarios.
Join us as we dive into the core of resilience, a trait that not only withstands pressure, but also catalyzes growth and stability within the demanding sphere of private equity.
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1. Paul, how do you define resilience within the context of private equity, and why is it particularly important in this field?
Resilience, in practicality, is all about how you deal with issues as they come up. You often are involved with assets for 3, 4, or 5 years, and it's a given that you'll encounter significant problems at some point. Believing that you won’t face challenges with an investment decision is a farce and the days of multiple expansion to alleviate bad decisions are long gone.
These challenges can be people-driven, process-driven, or market-driven. How you respond to these situations is crucial—it's what really determines the success or failure of your investment. Resilience in this context means having the grit and agility to navigate these challenges effectively and steer your assets towards positive outcomes.
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2. Can you discuss how the crisis management skills learned in the military translate to managing the high-stakes and high-pressure situations common in PE??
In private equity, you essentially have two types of asset outcomes: those that are performing to plan and those that are underperforming to plan.
For underperforming assets, military skills are the most fungible. In these scenarios, it's less about gentle persuasion and more about decisive action, kind of like being a traffic director in a high-speed, complex intersection.
The military trains you to respond effectively to ground situations, which is invaluable. As you move up the ranks in the military, you learn more strategic thinking and leadership development, which also translates well into PE. It’s like shifting gears from a battlefield commander to a strategic architect, designing plans for success in both 'wartime' crises and 'peacetime' growth phases in PE.
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3. Could you share an example from your experience where resilience played a key role in the success or turnaround of a PE investment?
In a previous role, we invested in this manufacturing company at a given baseline. Then, just six months later, after a failed factory consolidation, earnings were over 20%.
Our investment case went sideways, and the asset was now highly levered. It was an ‘all hands-on deck’ situation, we were all working tirelessly in the factory, day in and day out, to get things back on track, which took us about nine months to recover.
Meanwhile, we're dealing with our own underwriting challenges, but you've got to face these things head-on. You can only do so much due diligence from the outside looking in. In the end, though, we managed to turn it all around. The asset was exited significantly above our underwriting case.
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4. What strategies do PE firms employ to cultivate and maintain resilience within their teams and portfolio companies?
In hiring, I lean towards resilience and a bias for action. This way, when problems inevitably crop up, you've got a team that's ready to step out of their comfort zone. To train for this, I put people into situations—staff them into roles—where they're faced with ambiguity and must navigate this uncertain situation. This practice of tackling challenges without clear answers is like a leadership litmus test to prove out the capabilities of being able to recover an asset successfully.
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5. How does a leader's resilience impact the decision-making process and overall health of a PE firm?
On the operating side, you're often not going to have a complete view in the boardroom when things go wrong. There's a theme in certain private equity circles that when something goes wrong, teams can get caught up by asking backward-looking questions.
But what's most important is setting up a forward-looking plan, creating an agenda, and making decisions with imperfect information. It’s about figuring out how we're going to move the asset forward. That's the essence of resilience in this field.
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6. In what ways do you measure the impact of resilience on a PE firm's performance, and what indicators do you look for?
A key indicator of resilience in a PE firm is the longevity of the team. Limited partners (LPs) often evaluate funds based on the team's history: how long they've been together, the number of investments they've managed, and their track record of returns, including any complete write offs.
A resilient team is one that not only has successes, but also demonstrates the ability to recover from setbacks, aiming to – at a minimum - return capital to their investors.
These factors collectively can be predictive of a firm's potential success. When considering a firm or an operating team, it's crucial to understand how they address their mistakes. With numerous assets acquired across multiple funds, it's inevitable to encounter some missteps, and a firm's approach to these challenges speaks volumes about their resilience.
In exploring the role that resilience plays in private equity success, Paul Swaney highlights its crucial impact across various aspects of PE operations. Resilience enables teams to effectively navigate challenges, whether in managing underperforming assets, making tough decisions with imperfect information, or recovering from setbacks. This trait, nurtured during military service, proves invaluable in the PE environment: guiding strategic decision-making, fostering team adaptability, and driving successful results.