The 7 deadly sins of private equity

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Facebook/Stoner Sloth

One of the first things you learn in business school is that you can’t let your emotions rule your finances. Yet, in the world of private equity, I see this all the time.

Decades of experience and common sense quickly disappear when professional investors are confronted with basic instincts and urges. In fact, anecdotal observation has led me to the conclusion that most private equity professionals find themselves in a bad spot, not because of any outside factors, but because they commit a variety of internal mistakes.

So what are some of these self-destructive behaviors and what can you do to avoid them? Well, if you’re like me and found yourself running from nuns in your youth than you’re probably somewhat familiar with what I’m talking about, so read on for private equity’s seven deadly sins.


1. Envy

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VFS Digital Design/flickr

Envy is that voice in your head that’s telling you to buy the company across the street because you’re going through a rough patch. Whether they’re purchasing a shiny new product or acquiring a company for their management team (which might seem better than the one you’ve got — see below for lust), investors that covet their neighbor’s platform or assets are often under the dangerous impression that life gets easier when you have what others have. Just because your competitors look like they’re doing well doesn’t mean that they actually are; don’t focus on playing their game, focus on playing yours.


2. Lust

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Internet Archive Book Images/Flick

Lust is what happens when an investor lays eyes on a CEO who, at first, is both jedi knight and rock star at the same time. The belief, of course, is that somehow, one lone individual is going to single-handedly fix all of your problems and increase your profits by some astronomical amount. But reality is often a little more sobering. Many a private equity professional have pursued a go-getter executive with offers of uncapped bonuses, accelerated equity grants and more, only to find that these big shots often come with more baggage than a hoarder on a road trip, or that they’re all smoke and mirrors.


3. Gluttony

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Flickr/Bryan Maleszyk

Gluttony is the culprit behind most overzealous strategies, especially the ones where funds will make their companies take on too much leverage. Yes, the more debt you take on, the greater your gain on your return down the road — but can you guarantee that the market will shift the way you had planned? Taking on too much debt will also narrow down your long-term options, as your current debt constraints can weigh you down like an anchor.


4. Greed

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Gordon Gekko, “Wall Street”
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IMDB, Twentieth Century Fox

“Greed is good.” It’s one of Wall Street’s most famous lines and it’s also wrong. The temptation to raise as much money as humanly possible is a strong one, I’ll give you that, but deals don’t go so well when your eyes get bigger than your stomach. Listen to your limited partners and don’t try to do too many things at the same time. Private equity is a marathon and not a sprint, so instead of falling prey to greed, substitute this sin with a virtue — patience.


5. Pride

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Flickr / OhioStateEngineering

Pride, without a doubt, is the most common sin that you’ll see in private equity. How often, in this industry, do you actually hear someone tell someone else that they don’t actually know something? For associates, principals and partners alike, it’s all about keeping up appearances; after all, no one wants to look stupid — which, ironically, is just about the most stupid thing you can do as an investor. Far better to bite the bullet and ask a question at the Monday morning meeting; sure, you might be the proud recipient of a few jokes, but at least you won’t keep doing the wrong thing over and over again because you were too afraid to speak up. Investors who admit what they don’t know will be more successful in the long run, and as cliche as it sounds, there are no stupid questions (but Google is still your friend).


6. Sloth

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Many Americans are happy to do nothing.
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Michelle Callahan/Flickr

Sloth doesn’t mean laziness when we’re talking about the private equity community. Without a doubt, most of my peers are some of the hardest working people that I’ve ever met, but it’s not lethargy that holds investors back, rather, it’s the inability to make difficult decisions. The market shifts? Make a decision and stick with it. A CEO just isn’t cutting it? It might be better to make the hard call and fire them before things get worse. Theodore Roosevelt sums it up best when he says that, “in any situation, the best thing you can do is the right thing; the next best thing you can do is the wrong thing; the worst thing you can do is nothing.”


7. Wrath

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Asura’s Wrath Wiki

Wrath isn’t always a result of a bad day at the office, and frankly, most private equity professionals are too busy to spend their time angry at others. The markets, however, are a completely different story. Remember what happened with financial services during the downturn? How about energy or healthcare every four years or so? There are just too many examples of the markets – especially the regulated markets — hurling their wrath against an investment. Unlike the other sins on this list, wrath is the only one where you can’t really avoid; just hunker down and wait for the storm to pass.

For those of us with blood in our veins and beating hearts, it’s nearly impossible to avoid feeling at least one of these emotions on any given day — that’s what forgiveness is all about. However, the key is to keep these emotions from controlling your investment decisions. Hopefully, this guide will help you avoid an investment pitfall in the near future — or at least until someone comes out with private equity’s Ten Commandments.

Devin Mathews is a partner at ParkerGale, a private equity firm that acquires profitable, founder-owned software and technology-enabled services companies and helps them with their product development, sales, and growth strategy.