Private Equity is a highly challenging industry and it has seen impressive growth in Latin America over the last decade. As with most businesses, people are the key performance driver. But, in an industry that is relatively new in the region, are there enough qualified private equity professionals to support its growth?
In this article Victor Sera explores the qualities that make a PE/VC fund manager a success and how best to acquire a skillset through time, experience, and education.
By Victor Serra, Managing Director, MVM Value Creation Advisory
Private Equity (including VC) is a highly challenging industry and it has seen impressive growth in Latin America over the last decade. As with most businesses, people are the key performance driver. But, in an industry that is relatively new in the region, are there enough qualified professionals to support its growth?
PE/VC professionals must dominate a wide range of technical competencies and demonstrate practical wisdom, all of which are typically gained through hands-on experience over time.
Let’s start by listing the top five macro-activities entrusted to the PE/VC professional:
1) Fund structuring and fund raising
2) Dealing with investors: institutional LPs, co-investors, shareholding families
3) Conducting the deal: sector analysis, pipeline flow, negotiations, execution (in and exit)
4) Estimating company valuations (in, during, exit)
5) Creating value through actually operating the portfolio company.
In order to succeed in all of these areas, PE/VC professionals must dominate a wide range of technical competencies and demonstrate practical wisdom, all of which are typically gained through hands-on experience over time. Because the industry in Latin America is relatively new – both in number years and in terms of full investment cycles successfully completed in each country – only a small group of professionals have been able to reach master status.
Looking at it also from the stand-point of value creation, success is typically measured in “multiple of money invested”, “EBITDA multiples”, eventually “delta DCF”. These are driven by a combination of factors, i.e. favorable events and timing in terms of multiples, competitive landscape, regulatory environment, cost / availability of capital, IPO windows, among others. The PE/VC professional must therefore also be able to manage all of these factors, especially when difficulties arise. In Latin American countries volatility / uncertainty tends to be high, so there are frequent challenges, weighing on an already demanding activity.
While all of the activities listed above are important, I contend the most critical one to a PE/VC fund is point number five: to generate value by setting the conditions for portfolio companies to be managed more effectively, to operate more productively and competitively, creating the conditions to grow its customer base. This typically requires increasing the company’s ability to generate cash from its own operations; raising capital productivity above cost of capital; and doing all of this predictably and consistently. This is the key factor for reliable value creation.
Management teams should be competent to run portfolio companies, but they will not succeed if a) Board Members aren’t united amongst themselves to properly support the business, b) investment theses and pre-deal agreements – or even exit strategies – are crafted with the wrong mindset, c) GPs/Boards are not clear on what exactly a “good management team” should look like, or d) GPs/Boards aren’t capable or forging successful partnerships with the portfolio company’s management team.
Value creation through improved operations is based on people’s real life managerial experience – including pattern / behavior recognition. This is even more true in the case of targets which are, by definition, underperforming. However, that managerial experience base is the scarcest of all resources – including time, capital and technology – in Latin American countries.
Understanding the importance of managerial experience is the key to value creation, and behaving accordingly sets one apart. This also means embodying a sense of ownership and responsibility: it is the manager’s money and especially their responsibility towards the business, impact on employees, society, and stakeholders at large. It is incredibly rewarding to lead a business to growth and to still treat stakeholders and employees with respect!
In a nutshell: the PE/VC professional must be the key master mind, the environment-builder, the attitude-setter, the coordinator of all investors / shareholders / families, outside attorneys and accountants, board members, management teams, and at the same time the driver of change – industry assessments, business plans and analyses, execution, formal agreements, incentives / motivation elements, success metrics, governance and relationships, judgment on tradeoffs and so on. Neglect this role and the business will be an uphill battle.
Most professionals in private equity come from either management consulting or investment banking. Unfortunately only a minority come from operating companies, although one notices the early stages of a trend to populate PE/VC firms more with those types, thus balancing the competency set. Still, I argue that not enough Latin American professionals have had the benefit of completing successful full investment cycles, or have been trained with the attitude to create value in a more rigorous manner.
Fortunately, these professionals may enhance their management skills in multiple ways: i) Senior people may make themselves available for mentoring, transferring experience and best practices, although they may have little time, and interpersonal competitive dynamics might eventually come into play. And ii) one could also – as most rightly do – go and live the experience firsthand, learn by doing, play according to the circumstances – often with limited benchmark – in the end living and learning from both successes and failures. Remember to learn from those mistakes!
And they can attend school. There are a few B-School programs specifically designed for PE/VC professionals, varying by curriculum and attitude. As a faculty member (practitioner), I am partial to the executive education program for private equity professionals jointly offered by LAVCA* and the Wharton Business School: it is a perfect balance between academics, PE firm, and operating professionals – where the faculty delivers tremendous depth of content and real life experience.
As the highly challenging private equity and venture capital industry requires superior levels of performance and practical wisdom in Latin America, part of the challenge is to foster the supply of well-rounded, mature professionals. Smart people are naturally attracted to this environment, so the key is to provide them with real life experience, coaching, high quality industry-specific education, and, last but not least, a great attitude.
Victor Serra has driven operational and financial performance improvements for over two decades for private equity, multinational and family-owned companies such as Carlyle, Sara Lee, Wal-Mart among others. He has served as CEO/GM of six companies, VP of two others, and directed numerous business activities in over 30 countries. Throughout his management career, Mr. Serra has led restructuring, startups and organic growth. He holds an MBA from UCLA, a certificate from Harvard Business School, specialization from Chicago Booth, and currently teaches at the LAVCA Wharton Latin American Executive Education Program for private equity professionals. Today he serves as the managing director of his own boutique in Brazil, MVM Value Creation Advisory, and he is also an active member of LAVCA. For more on him, visit https://br.linkedin.com/in/VictorSerra.