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L ESLIE P RATCH an private equity investors (inves- management is likely to perform under highly
is a clinical psychologist tors) increase the odds that the stressful conditions is one of the most difficult
who specializes in helping
executives running their port- evaluations investors must make.
private equity investors
and senior executives folio companies will perform Typically, private equity investors look
identify whether indi- capably under novel and challenging con- at what an executive has done in the past. To
viduals considered for ditions? For example, how will operating validate what executives claim about them-
senior management roles executives respond if energy prices go up selves, they may also conduct interviews and
in companies possess the 30% in three months or if a significant war check references. That approach relies mostly
psychological resources
and personality strengths
breaks out? on measures of past performance. On its own,
needed to be successful. The article presents data gener- however, past performance is inadequate to
ated using a clinical psychological method forecast the future. As Warren Buffet (and
of assessment for nine executives of f ive the SEC) has reminded us, past performance
portfolio companies of a particular private is no guarantee of future returns. Measures
equity firm. It is one in a series of articles of past performance confound individual
examining the validity of a structural psy- capability and situational factors. How an
chological approach to selecting executives. executive has performed in the past may not
This approach links three components: the predict how he or she will perform in the
operating executive, the strategy, and the futureespecially as industry and organiza-
execution of that strategy. The article dem- tional conditions change.1
onstrates one application of this approach; it To predict how an executive will per-
treats each particular situation concretely, in form under novel or challenging conditions
its own terms, without trying to draw gen- requires a model that takes into account the
eral conclusions from the observed facts. dynamics of the executive, the strategy, and
Private equity-backed firms, because the operating environment. Knowing the
they have huge debt loads, have unforgiving effects of each component with a high degree
time spans for achieving goals and low tol- of detail can strengthen investors confidence
erance for variability in performance. Inves- that executives can perform as required.
tors depend upon management to manage Previously a series of articles that I
the operating business unit to meet inves- wrote with Jordan Jacobowitz presented a
tors desired financial returns. Most private psychological model for predicting leader-
equity investors regard the quality of man- ship in rapidly changing conditions.2 These
agement to be a crucial factor in a portfolio articles were based on research I led that
companys success or failure. Predicting how was funded by the University of Chicago
2 THE USE OF A CLINICAL PSYCHOLOGY M ETHOD OF A SSESSMENT TO P REDICT M ANAGEMENT P ERFORMANCE WINTER 2008
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company management, I do want to identify the role not evaluate the deal in terms of performance because
investors ascribe to management in a companys success or the investors to whom I limited this analysis decided not
lack of success. Exhibit 3 presents data about deal perfor- to sponsor Company A. In the case of the two compa-
mance and each executives contribution to it. In the first nies from which the investors had exited, the original
case (Company A), I can only look at how the executive prediction proved to be correct. In these cases, the pri-
performed and whether my assessment described how he mary metric used to assess performance was cash-on-cash
functioned. He is my first case study (Jack). I could returns, and the secondary metric was internal rate of
EXHIBIT 2
Portfolio Company and Investment Thesis
This exhibit shows the nature of the investment, the investment thesis, and if it changed, how it changed.
returns. Companies D and E have not had an exit yet but Executive Performance
investors are satisfied that the investments are doing well
and will be profitable. Investors rated three of the five Exhibit 4 summarizes the data on the execu-
companies as home runs in terms of overall investment tives performance. I asked investors to describe each
performance (Companies B, C, and E) and rated the per- executives contribution to the overall performance of
formance of one company as good (Company D). the deal. In two cases (Mack and Wayne), the exec-
utive (in those cases, the CEO) drove the success of the
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