The investor as leader

Achieving strong “returns on people” may be less – and more – important than you think.

One of our firm’s clients, a global alternative investment manager with over $100bn AuM spanning multiple asset classes, recently asked me point blank how essential I thought  “good leadership” was for success in the investing business.

“Not very” I responded – which, given I run a leadership advisory firm, and spend a significant proportion of my professional time coaching C-level executives on how to maximise their leadership impact – was met with a fair bit of surprise.

My answer may have seemed glib, but it was genuine, and based on the extensive experience our firm has had advising executives and firms throughout the investment industry on how to maximise their commercial outcomes in a complex, competitive, and rapidly evolving market.

While strong leadership is essential – and becoming increasingly so – in certain specific investment contexts, its presence and/or a focus on developing it are actually counter-productive.  As an ambitious investor keen to deliver superb returns, the key is to know which side of that line you sit on – and to take appropriate action. 

Let’s first look at contexts in which leadership, or a strong emphasis on the “people side” of the business can actually be detrimental.  In the most pure-play investing situations, which range from “buy low, sell high” equity trades on a prop desk, to classic private equity transactions in which value is created through financial engineering, and many situations in between, leadership skills – we think – are largely irrelevant.

Great decisions can be made by single actors and deal execution can be done effectively with small teams, so interpersonal issues remain at a minimum.  In fact, in these situations, over-attention to team dynamics, long-term capability development, or ensuring others’ motivation would quickly become a negative –  siphoning time, energy and attention from the transaction at hand.  Over-consideration of “people issues” might even cause transactions to fail, or fail to be completed, as the tricky work of making precise, and precisely-timed, financial decisions became that much harder as investors are forced to swim in a soup of irrelevant considerations.

So while the “leadership development industry” exhorts us to think of all professionals as leaders, and while many organisations roll out leadership training to all executives at certain rank – including investing staff – our firm takes a contrary view: Don’t focus on becoming a great leader when your eye needs to be on a purely commercial ball.  

That said, the major trends in the investment world are shrinking the number of these types of investment situations – rapidly.  The “two blokes and a Bloomberg” model of investment partnerships has faded as institutional growth and globalisation, asset consolidation, and proliferation of strategies at single firms, has combined to create larger-scale investing organisations beginning to resemble bulge-bracket banks in their size and scope.

To use one of our longstanding clients, KKR, as an example, what was not that long ago largely a US-focused PE firm with $50bn AUM, is now a global $150bn+ AUM firm with 21 offices across 5 continents and that just promoted over 65 people to MD or ‘Member’ (i.e. Partner). In one go!  Increasingly, KKR and its peers are also doing more complex and longer-term transactions as the search for returns intensifies, requiring investing staff to work through a thicket of managerial and regulatory issues.

In this context, or in any firm “scaling” to meet the needs of a competitive marketplace, leadership is key – key to the investment process, and key to the long-term platform.  For partnership groups, being able to direct, focus, align people towards best performance is essential.  For institutions, attracting, retaining and growing the right talent is vital.  And for investment committees and “on the ground” investment professionals, the ability to take dispassionate, evidence-based judgements about company management – an Achilles heel for many, even experienced investors – will increasingly impact short- and long-term returns.  (The research our firm has done over the past 45 years demonstrates that selecting people well is exceptionally difficult, yet as with sex and driving, most of us think we’re well above average!)

At all levels of the organisation, people decisions must be taken as seriously as investment decisions – and the right investments made in people to produce the best returns.

What does a move towards tangible-value-add leadership in an investing context look like?

For most of our clients, who typically sit ‘above’ investing staff, for example by chairing an investment committee, one key is using the right leadership tools to optimise the leadership decision-making process itself: creating the right context and an environment that is efficient and focused yet not rushed or constraining, that optimises the delicate support/challenge balance, that leads to informed and bold but not reckless decision-making, that values conviction yet dispassion is invaluable.

For executive committee members, partners, and human capital leads, the core leadership focus is on building the strength of the institution: providing – or ensuring others provide – clear direction, aligning large groups behind that direction, helping people take on and achieve more, driving a sense of purpose, and identifying and confronting performance issues.  While these goals sound large – and in some ways, are – what we routinely find with our clients is that by keeping commercial outcomes front and centre, and in looking at people- and leadership-related issues through that lens, solutions emerge and action can be taken….quickly.