Trust: a major driver of value creation in Private Equity investments

May 14, 2024

In the fast-paced world of Private Equity, where deals are often evaluated solely on financial terms, our survey sheds light on a crucial but often overlooked aspect: the role of human capital.

Through qualitative field research at a variety of Private Equity funds, our study looks at the nuanced dynamics between shareholders and company leaders and shows that trust is a linchpin to investment success.

Over the course of a year, we conducted in-depth interviews with managing partners, directors, relationship managers and shareholders of 11 different investment funds, specifically selecting those with an “interventionist” profile. These funds, known for their propensity to take majority stakes in small and medium-sized companies, provided us with valuable insights into the human element of investment decisions.

In an area where transactions are often perceived as purely financial, our findings challenge this perception. Despite the focus on growth potential and profitability, there was a surprising revelation: two-thirds of fund managers emphasised the importance of human capital in their investment criteria. One participant put it succinctly, “Meeting and fitting in with the management team can lead to an offer. Or not…”

However, it was the repeated mention of the word “trust” that really caught our attention. Alongside qualifications and financial projections, confidence proved to be a crucial factor in investment decisions. Our survey revealed that the critical question for PE fund teams often boils down to a simple but profound question: Can we trust the current management team to execute the business plan?

Indeed, our research emphasises the notion that trust can make or break an investment. An average deal with a trustworthy management team has the potential to turn into a great deal, while even the most promising deal can falter without a solid foundation of trust.

However, measuring trust in the context of Private Equity investments is a major challenge. Unlike financial metrics, trust is inherently subjective and difficult to quantify. It depends on personal relationships, making it a nuanced factor in investment decisions.

In light of these findings, it is imperative for Private Equity investors to recognise the intrinsic value of trust in their investment strategies. We therefore invite you to read our survey, in which we explore the multi-layered dynamics of trust in Private Equity.

Enjoy the read: Trust: a major driver of value creation in Private Equity investments