‘A money-making proposition’: Why this buyout firm focuses on diverse CEOs and employee engagement

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Twenty-nine floors above downtown San Francisco, with a sprawling view of the iconic Transamerica Pyramid and the sparkling-blue Bay, Mark Strauch's corner office looked like any other I've settled into while meeting with private equity executives during my career.

However, this conversation was different. Rather than hailing today's availability of low-cost financing with which to lever up companies, or extolling the virtues of "proprietary deal flow" — if such a thing exists anymore — Strauch was talking about something entirely different: personality traits.

Alpine Investors, where Strauch is a partner, takes a different, even radical, view on the drivers of return in its portfolio. As important as financial engineering or market-multiple expansion is the value creation that, Alpine believes, is driven by personal attributes of its companies' leaders and the cultures they foster.

Alpine, which focuses on software and business-services companies, most recently raised a $532 million fund, its sixth, in 2017.

Below are excerpts from my conversation with Strauch.

What have you learned about your sweet spot of investing since Alpine's founding in 2001?

One of the main things we've learned is that, in these types of investments, you need to be really great at talent. You need to understand the softer side and how it ties in with the more analytical side, and how paying attention to culture and talent actually helps you win commercially. It's not just some feel-good; it's actually a path to investment returns.

Where did that realization come from?

I think it came from a couple of different places. Many of us have been operators ourselves — I've been a CEO a few times over prior to being in private equity and experienced first-hand what a high-performance team feels like and how that actually makes money. So, that's something I've brought in, as have many of my partners at Alpine.

The other thing that happened to us, probably 10 years ago, was we were preparing for one of our annual portfolio conferences, where we bring all of our companies together. Our theme was 'how to build raving fans.' That meant both external customers and internal customers — employees. And in preparing for that, we used research that the Gallup firm has done, which showed that 85 percent of employees, according to Gallup, are disengaged at work.

Which is incredible. I mean, when you stop and think about that, it's like a soccer team with 11 players, nine of whom don’t know where the goal is. And it's even worse because, of the 85 percent who are disengaged, nearly half of them are what they call actively disengaged. Which means, not only do they not know where the goal is; they don’t care where the goal is.

That inspired us to look at not just how we, as financial, analytical investors, can help businesses grow with data and with sales and marketing and things of that nature, but how we can help them grow with culture.

So, we built a culture playbook, and we did it on ourselves here at the firm first through an executive coaching firm.

And really it has transformed how we show up as running our own firm, and it's transformed the way we roll with all of our portfolio companies, to put them into a place where they're trying to build best places to work — cultures that are highly engaged and high-performance. Because yes, it feels good, but again, because it wins commercially too. It leads companies to over-performance.

What does the playbook entail?

It starts with one of our core values: empowerment. One of the things that we probably believe that the rest of the world might disagree with us on, is that we think attributes, or personal characteristics, are more predictive of your success than your track record. In other words, who you are is more impactful than what you have done.

As a result, we have built a culture playbook that empowers young people to take on more and more responsibility here sooner than they might otherwise. And then one of the ways in which we support those people, rather than just throwing them in the deep end of the pool, is we provide coaching, executive coaching. Every level of the organization is available to receive three to six months of executive coaching here at Alpine.

And then in the portfolio, this playbook is: Every one of the employees of companies that we work with engages in personal vision sessions and company strategic planning sessions that get them to identify things like their greatest areas of strength and passion, and how they can really make a difference to their company. Because ultimately, that’s what engagement is about — it's to know what is the vision, where is the goal, and then exactly what impact do I have on that.

Some of the other things we do as part of that is, every 90 days, here at Alpine and in our portfolio, our companies do quarterly renewals. The idea of a quarterly renewal is you bring the entire company together in one place for one or two days, you stop the presses as it relates to the day-to-day business, and you zoom out and you say, let’s renew our commitment to our plan. Remember, this is our plan, this is our mission, and let’s renew our commitment to it and to each other. Celebrate what went well that we can continue to build on, and then talk about the things that didn’t go well that we need to fix.

And what results is the company takes one or two projects that are improvement projects, where we are going to attack this particular issue. And 90 days later, we've scoped it, we've done a rapid prototyping, and we are rolling out a change, an innovation, that makes that company better.

That 90-day renewal rhythm creates this amazing engagement, where people know what their role is and gain a true sense of ownership.

That's one of the reasons we measure employee engagement every quarter here at Alpine and every six months in the portfolio, to make sure that we are always tuned in to the question, do we have a high-performance team or not? Because good things happen commercially when you do.

You also have goals around the level of diversity among CEOs in your portfolio. How did that come about and why is it important to you?

It came about because private equity is a very un-diverse world. And I think private equity suffers as a result.

Diverse teams make better decisions; if you make better decisions, you're more successful in the marketplace. The data now is abundantly clear on this.

Yes, it's the right thing to do, to have a more representative population in the firm. But it's also a money-making proposition.

So, we started down the path several years ago of saying, how do we be intentional on this, what does this look like? And one of the areas we focused on was diversity in the CEO chair. And for us, the best way to attack that, the most immediate impact we could make, was not just to go out and hire experienced, say, female CEOs. Yes, that would be wonderful, but what if we could expand the pool of diverse CEOs as well? What if we actually could expand the pie? So, our very successful CEO-in-Training program was a terrific opportunity at the top business schools to attract a much more diverse set of CEOs in training, and then put them into our companies or very intentionally prepare them to be CEOs who we would subsequently back, which now we have done.

Today, we have 11 CEOs and five of them are women. That came from a cold start two-and-a-half years ago, when we didn’t have any. Everybody wants diversity, but how do you move the needle in a way that’s not 25 years from now? For us, that was one of the ways to do it.

What do you hear about this from LPs?

The LPs are really encouraged to see the traction that we have on diversity. And depending on who you're talking to, they have it as a headline issue or as a secondary issue.

There's also a lot of energy and interest coming from the talent side. If you're going to recruit the very best and brightest, you have to be diverse. You can’t just be, 'here is a bunch of middle-aged white guys.'

We've got a partnership with Girls Who Invest, which we're thrilled about, who are a source of interns and full-time hires for our firm. And there are a lot of other things like that, where you can really start to expand the pie. Obviously we as Alpine benefit from that, but I’d like to believe the whole industry could benefit from that.

Also in Human Capital: Girls Who Invest founder Seema Hingorani

If private equity were to embrace those types of things — whether it's diversity and inclusion, or the application of data and analytics to investment management, or even just more actively disrupting themselves — it would benefit the entire industry, because it's just too commoditized today. Doing any of those things now can be a competitive advantage for a private equity firm.

How do founders selling their businesses react to this approach?

Every founder has their own motivations, and every founder wants to get the highest possible price for their business, as they should.

But the other thing that founders care about is their legacy. And invariably, that reduces to: Are you going to treat my people well?

When you're selling your business, it's as if you're inviting the private equity firm into your living room for a long time. You want to do that with someone you respect, trust, and admire. So, how you show up, certainly in our part of the private equity landscape, matters a lot. That's why we show up with that people-first mentality.

How will this playbook have evolved if we have this conversation in three to five years?

That’s a good question. In three to five years, I would expect that we would have really moved the needle on diversity. We will have really moved the needle on the tangible effects of measuring engagement and its correlation with returns. And I'm hoping that those metrics, that tangible evidence, would convince more firms to adopt this approach.

In the meantime, the one question that keeps coming up in my mind is: If this is such a great way to win in the marketplace, why don’t more people do it? And it's a question that many of us ask ourselves, and I don’t know the answer. There are a lot of different ways to create winning investment strategies in the private markets. I just would like to see more firms shake the tree a little bit and have different types of people that lead to more dynamic conversations and more interesting innovation at their firms.

So, I don’t really know why more firms don’t follow this strategy. It feels very touchy-feely, and on one hand, it is. But it's also a way to win.

What do you think of Alpine's approach? Weigh in with your own take or experience below.