What Makes an Attractive Private Equity Firm?

Jonathan Grabel, CIO, New Mexico PERA, on what great private equity firms are—and are not.

“Fundamentally, you want to put money with firms with great cultures. This is true across the asset management industry. And the same is true when a private shop is looking at a deal: the most important thing is management.

Most good private equity investors tell you they will pick a great team over a great idea. A great team can make a good idea great; a bad team can make a great idea not great. The firm should be collaborative; it should be judgment-free. People should learn from their mistakes. Mistakes happen; mistakes shouldn’t be institutionalized or siloed. They need to be a learning organization.

GPs should encourage a certain amount of openness. There should be opportunities for merit and to grow the next generation. There should be cross-pollination of ideas. You don’t want to see firms that are too structured or siloed. You want to see a firm that understands all aspects of the business. You don’t want someone focusing on originating a deal and not living with that portfolio company; you don’t want people structuring deals and not being involved with the origination or execution; you don’t want people who are just focused on the transaction. You want people who are focused on every aspect of the organization because it makes them better for it. It makes them better at it.

You want a firm that is open to change; times evolve. You want a firm that is hungry. You don’t want a firm that takes imprudent risk, but we as asset owners pay a heck of a lot of money to these firms. We want firms that are populated with people who are super smart, that are goal-aligned, and who want to make a lot of money. You want firms that have the most passionate people about their investments and what they do. At the same time, you want firms that are dispassionate. They don’t fall in love with the portfolio companies and know that if it isn’t working, rather than putting in more money or changing out management, they look to sell and potentially limit their losses. That dispassionate nature of investing needs to exist.

You want firms to understand whose capital it is that they are investing. That their fiduciary duty to their partners is aligned and they don’t fall in love with being on corporate boards and being best friends with CEOs of portfolio companies.

I am going to keep going because I think there are a lot of things that make great firms. You want diversity in firms. You don’t want sameness. Similar backgrounds produce similar thinking. Multi-dimensional diversity at GPs is healthy. You want diversity of age, training, gender, and race—you name it. That is very important.”

Jonathan Grabel1 Jonathan Grabel is the CIO of the Public Employees Retirement Association of New Mexico.

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