PE firms must strike balance between expanding, preserving culture - AVCJ Forum

Guy Hands, chairman and CIO of Terra Firma Capital Partners, said that he would rather raise a fund and do 10 deals over the next five years than do it as an individual investor, but he expressed frustration at the fundraising process itself. While larger firms are able to delegate fundraising duties to investor relations departments, smaller players must rely on deal-makers to interact with LPs.

"You are taking them away from their core strategy. How do you expect to have consistent performance if you take these people who get that performance and take them on the road to raise money," Hands said. "The great evil of private equity entrepreneurs is raising money."

Ming Lu, co-head of Asian private equity at KKR, added that his firm goes to great lengths to ensure that continued expansion across different geographies and asset classes doesn't dilute the internal culture. KKR's values - partnership and alignment of interest, a one-firm approach, creativity, and a locally-enabled global strategy - have been written down and are frequently reiterated in meetings.

"KKR's founders have taken what was once a single product in a single market and successfully created a multi-strategy product on a global scale. It all comes back to a strong culture that the founders have instilled within the firm," Lu said. "We have expanded into different markets but we keep our DNA."

This approach involves striking a careful balance between institutionalization, scale and the entrepreneurial instincts that underpin private equity. Robert Ohrenstein, global head of private equity and sovereign wealth funds at KPMG, observed that global firms have an innate advantage in being able to reach out to a lot of investors, but diversity is no guarantee of success.

"A multi-strategy firm cannot be a market leader in every strategy. It gets tougher with every incremental strategy," Ohrenstein said. KKR's Lu agreed that each strategy must be able to stand on its own in order to attract investors and attract investment talent over the long term.

Hands observed that investors must avoid the mistake of assuming all private equity firms should be the same: one group's DNA is not going to be the same as another. This impacts individual firms' approaches to running their business on a global and a local level.

"You can industrialize alpha but we cannot be all things to all people," he said. "What is the culture that is right for this organization? You cannot have a strong, centralized structure and strong regional decision making. You can have a system to empower people at local level or have a centrally controlled system that allows people to execute at local level."

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