Competencies, Clusters, and Skews in Private Equity: Exploring the Investment Professional Competencies That Distinguish Extreme Outperformance in One Leading PE Firm

Turetsky, Avi I.

Using the real world laboratory of one leading private equity (PE) firm, this paper attempts to directly connect professional competencies to performance outcomes, and more specifically, to skewed performance distributions. Though no extant research appears to focus on the shape of PE return distributions, data presented in multiple studies indicates that returns are right skewed at the levels of funds and individual portfolio company investments. At both levels, a small percentage of actors drive an outsized portion of industry returns. This paper finds that within one leading PE firm, this right skew exists at both the levels of individual investments and investment professional portfolios. The paper then leverages methods from organizational behavior, finance, and statistics to identify the mixes of investment professional competencies that distinguish right-tail outperformance within the analyzed firm, and then attempts to link these items to investment outcomes. The paper finds that professionals who lead outperforming investments tend to excel in three different clusters of competencies and related style elements (identifiable behaviors that may be based upon groups of competencies), that they display more robust and varied toolkits within each cluster than do professionals who lead underperforming investments, and that these mixes contribute to investment outcomes in identifiable ways. Keywords: Competencies; competency clusters; power laws; private equity; private equity returns; skewed distributions; leadership styles

Private equity
Management
Weatherhead School of Management

Creative Commons Attribution-Non-Commercial https://creativecommons.org/licenses/by-nc/4.0/

http://hdl.handle.net/2186/ksl:2006058273