monsters and superheroes · become iron man, innovations such as big data, artificial intelligence,...

MONSTERS AND SUPERHEROES PRIVATE EQUITY IN 2018Meet human-machine Frankenstein innovative Iron Man and cyber-savvy Jason Bourne

2

SUPERRETURNBrand Strategy Director

Dr Dorothy Kelso

Head of Product Process and Delivery Rosemary Fitzgerald

SuperReturn Series ProducersAbbie Cooper

Svetlana FathersChris HibbertAmelia Offer

Michaela Virtue

Digital Content EditorAnnie Su

Business Development DirectorEmily Porter

CONTRIBUTORSFounder and CEO Star Mountain Capital LLC

Brett Hickey

General Partner Atlantic Bridge CapitalDavid Lam

Managing Partner Arbour PartnersJames Newsome

P3 Top four industries being transformed by the augmentation of humans and machinesDigitalising traditional industries and embracing innovation

P5 Data breaches are going to increase what are you going to do about itWhat you need to do to beat the cybercriminals

P9 Direct lending 20 going far wider and a whole lot more directBetter technology and plenty of data to help you scale up

P11 Grit a key determinant of your companyrsquos successGood things come to those who are sticking it out

CONTENTS

Disruption in the form of technology change and advancement is set to be one of the biggest themes that will shape the private equity industry in the year to come

Technology is continuously advancing and evolving As it extends its influence on more industries than ever before it is on track to gain more interest and becoming more attractive for investments

Other than the availability of new opportunities we will also need to be wary of the implications brought by the digital disruption - how we will need to adapt to the changes and the appearance of new risks that we have never faced before

Will this be embraced as an opportunity or defended against as precaution The innovative responses from private equity will be interesting to watch out for in the year to come

In our first SuperReturn quarterly eBook series for 2018 we focus on the ever-changing world of technology and its effects on the private equity industry

What kind of new risks and opportunities will it bring How should the industry react to the impending changes and maintain its resilience to changes

ANNIE SUDigital Content Editor

INTRODUCTION

Industry 40 which refers to the confluence of leading software and hardware innovations to digitise traditional businesses has exploded over the past few years into a $75B market growing at 15 CAGR to over $150B by 2022 While futurists debate the existential threat of machines Industry 40rsquos immediate impact is to significantly enhance human productivity across a wide array of industries

Four traditional industries that are undergoing technology-driven business transformation

1 Field serviceFrom The Cable Guy to your air conditioning installer to the repairman for heavy equipment the field service industry employs hundreds of thousands of people worldwide Companies such as FieldAware are building upon advancements in mobile and cloud computing to enable customers ranging from small enterprises to Fortune 500 industrials to deliver real-time scheduling trouble-shooting work order approvals invoicing and payments all through a mobile platform That means live status updates higher success in fix rates dynamic scheduling less overhead from paper e-audit trails and shorter billing cycles for service operations

2 Manufacturing and logisticsMy first summer job as a teenager was working on a production line assembling computer terminals The physical nature of this work hasnrsquot changed in 30 years and the ability for frontline workers to use both hands to perform tasks is more important now than ever Ubimax brings Augmented Reality (AR) to the shop floor integrating its software platform with existing technologies (eg hand

scanners cameras sensors RFID tags etc) and off-the-shelf AR glasses to enable handsfree untethered movement within manufacturing and logistics facilities DHL BMW Samsung and others use Ubimax to ldquovision pickrdquo items manufacture products perform remote support and train staff This technology materially impacts businesses by lowering error rates shortening time to complete tasks troubleshooting problems faster and increasing employee satisfaction

Rudina Seseri Founder and Managing Partner Glasswing Venture discusses artificial intelligence and how it will disrupt the tech industry

3 GovernmentAcross the globe governments are implementing ldquosmart cityrdquo initiatives that use mobile and cloud technologies to connect their citizens ndash via mobile and in real-time ndash to local services assets and information For example Civic Connect one of the established leaders in the mobile eGovernment market delivers persistent up-to-date traffic information in the San Francisco Bay Area parking availability in San

3

TOP FOUR INDUSTRIES BEING TRANSFORMED BY THE AUGMENTATION OF HUMANS AND MACHINESDavid Lam

There isnrsquot a single industry that isnrsquot ndash or wonrsquot be ndash affected by the relentless march of technological innovation Jason Lam General Partner at Atlantic Bridge Capital lists four key traditional industries that are undergoing technology-driven transformation

Diego and tourist information in Fort Lauderdale Singapore enlisted Artificial Intelligence (AI) leader Prowlerio to use the start-uprsquos reinforcement learning algorithms for decision support simulations in the countryrsquos ambitious Smart Nation program Cities and their residents significantly benefit from these technologies through shorter commute times efficient resource allocation (eg ride sharing emergency response) and increased economic development

Innovations such as big data artificial intelligence robots and computer vision are equipping the industrial ldquodesklessrdquo worker with a variety of tools to boost productivity

4 ConstructionFor decades the construction industry has used various land-based measurement tools and sensors throughout the building process The rising popularity of consumer drones has led to a proliferation of these robotic devices in the Architecture Engineering and Construction (AEC) industry 3D Robotics a leader in the AEC drone software market has partnered with the worldrsquos largest drone company DJI and the dominant provider of AEC design software Autodesk to enable footage from 3DR drones to integrate into the workflow of infrastructure design and construction Examples include tracking Autodesk 3D CAD designs against real world structures creating an aerial system of record for a construction site and volumetric measuring of critical materials Drones deliver significant tangible ROI in the AEC industry by detecting errors early in the construction process tracking percentage completion of construction projects and optimising logistics for usage location and replenishment of high value materials

Just as billionaire Tony Stark steps into a robotic suit to become Iron Man innovations such as big data artificial intelligence robots and computer vision are equipping the industrial ldquodesklessrdquo worker with a variety of tools to boost productivity This powerful combination of people data and machines has significantly increased human potential in the modern enterprise

26 February - 1 March 2018InterContinental Hotel Berlin

550+ LPS UNRIVALLED NETWORKINGThe best opportunity to turbocharge your fundraising efforts

To whet your appetite herersquos a snapshot of the LPs attending in 2018 ADIA CPPIB The Wellcome Trust Allianz Capital Partners PGGM GIC OPTrust Private Markets Group Robert Wood Johnson Foundation

FIND OUT MORE gtgt

4

5

Technology and data based lending platforms are now increasingly tapping global pension funds and insurers for capital and serving tens of thousands of SMEs with loans One marketplace lender is deploying its data systems and over 800 people worldwide to crunch millions of data points to allocate $100m per month directly to SMEs on behalf of its capital subscribers

Welcome to direct lending 20 The diversity and steady income that technology is bringing to credit investors is highly encouraging If we only ensure that it is a natural evolution building on the proven principles of credit investing this potentially vast capital market is a sustainable alternative to the banking system

Since the financial crisis over half a trillion dollars globally has been deployed by non-tech direct lending funds into hand crafted corporate middle market situations

Direct lending 10 a successful climb to hereSince the financial crisis over half a trillion dollars globally has been deployed by non-tech direct lending funds into hand crafted corporate middle market situations Some have financed private equity buyouts and some have funded companies looking to grow Offices have been opened in locations all over Europe and the USA to source and structure face to face high-yielding loans without banksrsquo involvement Investors have responded and scores of new asset managers have launched to provide the expertise for pension funds to invest in credit

However there are signs of plateauing in what is currently the largest sector of private debt 10 the financing of private equity buyouts According to industry watchers PDI traditional direct lending funds raised US$111 billion last

year down from $120bn in 2015 This yearrsquos fundraising has kept pace but the exponential growth of four to five years ago is not there This is in part because investors are concerned about how quickly and how effectively the existing cohort of lsquoanaloguersquo direct lending funds can source the hand-crafted loans of euro10m to euro200m in size that is their staple diet Will private equity MampA activity still the source of most private debt offerings remain robust enough and of sufficiently high quality to absorb all the new investor capital

Moreover most of the private debt funds in direct lending 10 have been providing credit to only 10 to 20 firms each per year In fact the $700 billion of non-bank lending deployed in the years since the financial crisis has gone to just a few thousand companies worldwide This is a tiny fraction of the number of SMEs looking for better credit solutions

Marketplace lenders helping investors reach far further and fasterMeanwhile as in so many other spheres of life technology is shaking up the processes by which we make decisions and allocate resources in the capital markets Alongside the growth of private debt funds there has been demonstrable progress for technology platform lending typically known as marketplace lending Only around $20bn has been deployed so far a fraction of the total in the private equity-based lsquodirect lending 10rsquo but this has gone in smaller loans to up to a quarter of a million global SMEs since 2010 Through these data rich platforms pension funds and insurance companies are allocating directly without investment banks and private equity firms in between to much more diverse and granular pools of credit

A fund served by a marketplace lender (MPL) may allocate credit to tens of thousands of SMEs in loan sizes of less than one million euros or dollars achieving a yield from the loans at similar or better levels to those in the traditional private equity based direct lending Moreover marketplace lenders are showing default and recovery experience in many sectors better than that of the banks

DIRECT LENDING 20 GOING FAR WIDER AND A WHOLE LOT MORE DIRECTJames Newsome

How has direct lending developed through the years to scale up and branch out James Newsome Manging Partner at Arbour Partners shares his thoughts

While the platform lendersrsquo machines have been learning and improving their own credit selection algorithms the business models of the lenders have undergone some crises and rethinking which is healthy Some of the well publicised difficulties of Lending Club and other US platforms who have mixed consumer and SME loans for example have given some equity investors in the sectorrsquos firms reason to pause

Such is to be expected While the models that work will scale up lead the sector and attract professional capital others will consolidate and some will fall by the wayside One would worry if this were not yet the case

Insurance companies and pension funds in particular are becoming a larger part of the capital allocation to the marketplace lenders

The platforms which attracted equity capital have been able to build their tech capabilities and their human resources very rapidly One lender Funding Circle has over 800 people worldwide working on credit monitoring origination technology compliance and capital markets functions This means that they havenrsquot actually needed to lsquoachieve more with lessrsquo the usual technology company mantra It is the next phase of the MPLsrsquo development ndash providing a channel for institutional investors in large scale ndash where they will achieve that operating leverage The key to that is raising large amounts of pension fund and insurance capital to put to work in their now seasoned lending operations The best platforms are about to do that big time

Insurance companies and pension funds in particular already familiarised with direct lending through the 10 providers are becoming a larger part of the capital allocation to the marketplace lenders This is because for certain types of credit underwriting ndash namely high volume shorter term SME credit ndash the powerful new data analytics and communication hubs are bringing about a fundamental shift Platforms can achieve both tremendous granularity (percentage position size of the fund in each credit) and constant or even improving quality of underwriting processes Aegon of the Netherlands has just announced a partnership with Funding Circle that will channel credit to over 1000 SMEs in the UK the USA Germany and the Netherlands

The platforms who have kept to the SME focus on the lending side and were early to the institutional investor conversation can now show over 5 years of default and recovery track record They can also show a good amount of transparency ndash down to loan by loan monitoring data Typically the leading platforms are facilitating lending to firms that themselves average 10 years of operating history

All this is music to the ears of institutional investors ndash they are seeing broad and fast deployment of funds reduced risk concentration regular income disbursement and the ability to deploy large funds above euro500 million

Scaling up from here four big lessons we have learned from historyLetrsquos take a step back and carefully revisit our assumptions So often at this stage in a cycle when the demand for credit investments exceeds the supply people start to stretch the core principles of credit investing The manufacturers of new investment products (typically old products with new acronyms) ride into town The rest of that story is our living history The most dangerous words in markets are of course ldquothis time itrsquos differentrdquo So while the promise is great is the technology being deployed by the MPLs really able to shift out the curve that sets volume against quality

To help us answer these questions letrsquos do what Einsteinrsquos idiots didnrsquot do and look at history to see what we can learn What are those core principles in credit markets and how do they get compromised Then we can assess whether the technology now available is able to give us greater width and scale without compromises We donrsquot want it to be different we want it to be fundamentally right but also bigger and better than the financial system which melted down in 2008

I see the four horsemen of the credit apocalypse as inverted telescopes buying the packaging maturity transformation and leverage on leverage So letrsquos take these one by one and look at what is going on

1 Donrsquot invert that telescopeWhen we invert the investing telescope we zoom out rather than in thinking we will see useful overall patterns The problem is once you fail to see whatrsquos actually going on in each data point in large samples you donrsquot actually see any patterns ndash and start to make assumptions usually over-positive lsquoUS housing prices donrsquot fall on a nationwide basisrsquo was the most widely cited fake pattern in the pre-2008 period

7

The leading platforms are accessing analysing and constantly monitoring thousands of data points on each SME borrower

The data-led lenders are however able to burrow pretty deep into the SMEs they are lending to and to stay down there The leading platforms are accessing analysing and constantly monitoring thousands of data points on each SME borrower With loan sizes of euro50000 to euro1m the leading platforms are typically taking full sight of borrowersrsquo bank accounts and receiving early signs of deterioration which may impact loan payments Some platforms are crunching data reported to the authorities by SMEs that they are not even lending to to enrich the data learning process This helps to recalibrate more accurate default prediction models

This modelling is not the inverted telescope of the subprime market pre-2008 They ran wonderfully complex Gaussian macros on hundreds of thousands of mortgages to help create AAA bond ratings but down at the coal face where the credit was actually created they relied on self-certifying salary data and sketchy financial status information Every London cab driver can now sum up credit modelling in the City of London by saying lsquoif you put garbage in you get garbage outrsquo

The SME-focused platforms of direct lending 20 on the other hand are using data from the official filings of companies which average around 10 years of operating history to drive their machinesrsquo learning

2 Remember packaging is Just packaging

The financial packaging created for investors when mass scale-up of credit investment takes place often exaggerates these fake assumptions In the subprime bubble of 2005-2007 the packaging of new securitisations and CDOs retained the same AAA attachment points and if anything tighter and tighter spreads on their liabilities ndash supposedly an indication of less risk ndash while the poison flooded into the system In the hunt for yield buyers loaded up on the shiny financial packets as has been chronicled in countless SEC investigations senate hearings and Hollywood movies

So how are the data-led marketplace lenders of today bringing in their investors In many cases large institutions have been committing to the platforms in remarkably simple investor agreements whereby they commit to capital amounts that are drawn over time and the platform commits to pass through all interest and principal after service fees The complexity is not in the packaging itrsquos in the data ndash and that is being systematically mined and learned from Yes some of the lending platforms are doing securitisations On first principle this is not a bad thing at all However the mass adoption of securitisation has in the past driven down yields and in my view has led to deterioration in underwriting standards just so that the SPV beasts can be fed In this respect they should be careful but as long as the credit origination process remains robust these deals will perform

3 Be either a lender or a borrower

Borrowing short to lend long ndash maturity transformation ndash is of course the perennial bogeyman of credit crises

who never actually gets killed off The marketplace lending platforms however are not yet deploying this practice Their own balance sheets are still heavy with venture equity If they start to play the maturities either in their own balance sheets or with SPVs we know the woods are once again becoming less safe to go into A virtue of the sharing economy ethos which infuses the platform lender model is that little manipulation of financial structures is done between lender and borrower

While leverage on leverage may not yet be a feature of the marketplace lenders there may be some lenders on the platforms who are themselves leveraged and borrowing capital to lend to SMEs through the platforms at higher rates The leading marketplace operators however are taking in large pension funds insurers and funds of funds as direct lenders to the SMEs Institutional investors of this type are not typically leveraged entities

Also these fundsrsquo capital if anything is longer-term than the loans the platform lenders are making which are typically less than five years in final maturity Moreover some platform lenders are able to make amortising loans so that the actual duration is less than three years The investment vehicles the MPLs are offering to institutional investors are therefore also able to be shorter in some cases than those of the 10 debt funds

4 Check your alignmentA mantra among investors which has proved important in the past is lsquoalignment of interestrsquo It is here that some investors still have concerns about the MPL platforms When inviting institutions to use the platform to act as direct lenders the platforms in many cases are not charging the usual annual management and

performance fees in the private equityprivate debt fund model The platform will take a one-off payment each time a loan is originated A borrower will borrow 100 and receive 97 with the platform taking the difference The investor will have provided 100 and is expecting 100 plus annual interest in return There may also be an annual servicing charge to the investor for the operation of the platform Beyond these contractual payments there typically will not be any other direct performance fee charged by the platform to the investor

So what incentive does the MPL platform actually have to make sure that the loans they make perform well and are managed intensively during their term Here some institutional investors more used to the private equity model will be in the mind-set that asset managers only do great if they get rich for doing great The lending platforms however like banks above all need to be disciplined The machines need to source and crunch all the right data The humans need to act on the data they see Finding lsquoalpharsquo and outperforming benchmarks is not the name of the game For this reason the alignment of interest for investors is in the platforms needing to run the most disciplined operations in the market with the lowest default rates for a given return level to be able to attract the most investors Unlike banks which levered up equity to increase return for shareholders the platformsrsquo game is to increase size and therefore profitability through operating leverage not financial leverage They only increase size by showing as little volatility in their lending as possible to the lenders they bring into the platformIncentives are never perfectly aligned in asset management For credit investors it seems to me that they have as much of a fit here as they do in credit funds where outperforming a hurdle may encourage extra risk taking

Through evolution not revolution this credit market will make progressMary Shelly wrote that lsquono man chooses evil because it is evil He only mistakes it for happiness for the good he seeksrsquo As long as we stick to the principles of markets which have been proven indispensable over time institutional investors can safely lsquoseek the goodrsquo of yield diversity and a regular

8

income through the well-run technology platforms This should probably be through investing in a combination of the traditional direct lending funds and the market place lenders Many bell-weather institutional investors such as Railpen in the UK are already doing so In the UK in particular the regulators and the government itself are firm supporters of the model

I think we will therefore see an investor surge into the market place lenders this year as direct lending 20 takes shape Growth is sustainable ultimately if it is spurred by evolution not by revolutions Financial innovation cannot alter or disregard the fundamentals of credit and of markets

If we evolve by finding better ways to apply these principles to new participants who previously we couldnrsquot reach with finance then we may even help the stagnant economies of the West to return to growth

More news More insight

More fintech discoveryIntroducing the new and improved FinTech Futures a digital

publishing platform for the worldwide fintech community

Built on the renowned Banking Technology brand the industryrsquos go-to news resource for over 30 years FinTech Futures provides daily updates in-depth analysis and expert commentary across a broad range of areas

FinTech Futures also incorporates the monthly Banking Technology magazine and Banking Technology Awards ndash an annual event recognising excellence and

innovation in the use of IT in financial services and the people who make it happen

Find out whatrsquos happening ndash visit us online and subscribe to our free daily newsletter

LendTechWealthTech

Contact Alec Gost Email alecgostknect365com | Tel +44 207 017 6122

FinTech_Futures

wwwbankingtechcom

As a former ethical hacker with two decades of experience in the Information Security industry Jason Hart helps organisations stay one step ahead of advances in cyber threats

In a nutshell we should forget everything that we think we know and completely change our mindset Data breaches are going to get worse they are going to do more damage and most of us simply arenrsquot aware of how little we are doing about it he argues

ldquoData is the new oilrdquo states Jason ldquoBecause itrsquos just as valuable The challenges in security that we face are enormousrdquo he says

Why is data the new oilBecause it can be monetised says Jason A hacker can infiltrate data extract it refine it redistribute it and use it for financial andor political gain Data integrity attacks have the power to bring down an entire company And the problem was only going to get worse he said as the Internet of Things (IoT) ndash the process whereby all products and processes are linked via the internet ndash proliferates

ldquoIoT is not your traditional techrdquo says Jason ldquoIt has multiple personas the manufacturer of the device the consumer the cloud provider the 3rd parties the APIs there are five different environments processes ndash and security risks

While you may think that we are already in the age of data Jason says we had barely crossed the start line The

explosion in data was yet to come driven mostly by the Internet of Things

ldquoWe create more sensitive data than you can imagine Every time you click on your phone yoursquore creating data Since 2013 over five billion pieces of individual information have been compromised ndash but thatrsquos only what has been reported They occur on a daily basis and they are never publishedrdquo he warns

The problem is that few understand the critical importance of knowing the impact of people data and processes and this was the weakness that cyber criminals were exploiting

That means more data for criminals to get their hands on he says But the real problem is that it is so easy for them Passwords can easily be mined from the web as could encryption keys two of the major systems in use to prevent people accessing our data

ldquoThe days of me as an ethical hacker spending weeks to gain access to an organisationrdquo (something at which by the way he was 100 successful) ldquoare gonerdquo said Jason ldquoIt now takes minutes if not secondsrdquo

But the solution he says lay in our own hands

DATA BREACHES ARE GOING TO INCREASE WHAT ARE YOU GOING TO DO ABOUT IT SuperReturn Series

While innovation is worth getting excited about itrsquos not all singing and dancing when we come to embracing new technologies Former ethical hacker Jason Hart talks to us about the world of information security in cyberspace

10

Situational awarenessWe all need to be a bit more like Jason Bourne suggests Jason Bourne for the uninitiated is the lead character in the eponymous series of films who is forever eluding the authorities He does this by always knowing and assessing what is going on around him ndash what our Jason calls ldquosituational awarenessrdquo

The problem is that few understand the critical importance of knowing the impact of people data and processes and this is the weakness that cyber criminals were exploiting There are those that are simply ignorant who just arenrsquot looking or considering the impact of people data and processes And there are those that are arrogant and think they know it all thinking that massive investment in the latest security products is enough But it is that very arrogance that makes them vulnerable

In both cases there is a serious lack of situational awareness

A new mindsetldquoThese problems can all be solved overnight but we need to think differently We have to know what the risks are that we are trying to mitigate We need a new mindset as wersquore still in the world of breach prevention Yoursquore never going to prevent a breach ndash there are too many elements data in too many placesrdquo he says

ldquoWe need to change our attitude to one of breach acceptance The key is knowing what it is that you are trying to protect Think like a bad guy - what do they want They want datardquo

ldquoAccept that breach is going to happen but understand what types of data you have where it is and what the processes are and yoursquoll get a head startrdquo advises Jason ldquoIt all comes back to the same thing situational awareness

ldquoI see organisations around the world writing huge cheques for technology to solve the problem but they donrsquot know what it is they are trying to protect Where is that data What type of data is it Personal Credit card Trade secretsrdquo Jason asks

ldquoYou have to know where it is what the process is how people get to it You have to understand what the risk is Is it a confidentiality risk Or an integrity risk Depending on which you can apply the appropriate actionrdquo says Jason

ldquoItrsquos really that simple The world is all about data Unless we face up to the problem and solve it itrsquos only going to get worserdquo

26 - 27 February 2018Hotel Palace BerlinBerlin

PUTTING VENTURE CAPITAL AND GROWTH EQUITY CENTRE STAGE

Where VCs and LPs come to learn and invest

CLICK FOR MORE gtgt

Finance is an inherently quantitative discipline at least from the perspective of a portfolio manager Chief Investment Officer and investment team Successful investors tend to be organised thinkers oriented towards data-driven decision making Thatrsquos not to say those with a penchant for management sales or communications cannot become successful investment professionals but ultimately financial performance is measured in numerical results

In my experience building Star Mountain Capital and Star Mountain Charitable Foundation over the past seven years as well my observations from being on the boards of the Young Presidentsrsquo Organization (YPO) Harvard Entrepreneursrsquo Alumni Association NY and the Small Business Investor Alliance (SBIA) I have observed a common characteristic among highly effective executives across roles and industries It defies quantitative assessment and I am convinced it is critical to long-term consistent success grit

Grit is among the most important predictors of success and every individual has the power to increase how much of it he or she brings to bear

Grit comes in many flavours and has many components ndash determination drive tenacity etc ndash and it means different things to different people One personrsquos major challenge is anotherrsquos speed bump In all cases the concept of ldquogritrdquo is the innate desire and ability to endure adversity through perseverance and passion to achieve a goal Despite its

importance this quality of grit is not easily measured yet it is the core trait that will sustainably push your organisation through difficult times

Grit is the linchpin of a strong organisational culture As Angela Duckworth found in the cadets at the US Military Academy at West Point grit is among the most important predictors of success and every individual has the power to increase how much of it he or she brings to bear In fact when I reached out to her regarding this article Angela commented ldquogrit holds special significance for the achievement of excellence This is true whether the endeavour in question is physical mental entrepreneurial civic or artistic When you look at the best of the best across domains the combination of passion and perseverance sustained over the long-term is a common denominatorrdquo

Gritting it outAs a founder and CEO building and motivating a team of individuals with complementary talents passion and purpose is probably the most important job I have As part of this I look closely for this hidden element of grit since it is what determines how my organisation will persist when the going gets tough ndash and to achieve great goals and build a distinctive business I believe substantial challenges are a given As the saying goes ldquoeveryone is a genius in a bull marketrdquo and everyone looks equally determined when things are going well Itrsquos when the chips are down obstacles loom and serious challenges await that a leader sees just how much good old-fashioned grit exists on his or her team If your team has it they will find a way to win Otherwise your chances of foundering are much higher

12

GRIT A KEY DETERMINANT OF YOUR COMPANYrsquoS SUCCESSBrett Hickey

ldquoEveryone is a genius in a bull marketrdquo Brett Hickey Founder and CEO of Star Mountain Capital explains why grit is a crucial factor for success

There is an old adage that leaders are born not bred I believe this is partially correct however I also believe grit can evolve from mental toughness and a developed attitude of trying onersquos best and an unwillingness to give up during lifersquos early challenges Traits like passion discipline and perseverance are all difficult to learn if you have not developed them by the time you are in your early twenties Those with grit have also developed the habit of not blaming others for their challenges and mistakes I believe it becomes a part of your DNA

Conversely technical or administrative skills are much easier to learn and often simpler to apply and while raw intelligence and talent are great to have neither are guarantees of success The lesson from my experiences is that it is the innate ability to push through obstacles that can bring the full power of onersquos other attributes to bear and ultimately what is a key driver of long-term value creation both individually and for businesses

The most successful business owners I know are the ones that have encountered and pushed through very substantial challenges

This doesnrsquot mean everyone in your organisation needs to have the grit of an Olympic athlete or a military cadet in order to be valuable or successful but without it I believe a substantial portion of onersquos talent education or intelligence will be left on the table just when it is needed most I also believe that there are key defining moments in life and business where one must choose whether to persevere or give up and only those with a resilient mindset will stay the course

These observations are not just from my own experiences Irsquove seen grit at work in countless of other environments through deep relationships with hundreds of CEOs through our investment activities the YPO networks to which I belong and the CEO-focused program I did at Harvard Business School In all cases the most successful business owners I know are the ones that have encountered and pushed through very substantial challenges Without this concept of grit I do not believe they would have achieved their current success

How do you find individuals with the requisite grit to be on your teamAt Star Mountain developing and maintaining the proper corporate culture is of paramount importance and we believe a direct correlation exists between those who are willing to serve a purpose higher than themselves and those who will do right by our investors when times become challenging This higher purpose can take many forms ndash community involvement military service volunteering etc ndash but such individuals tend to have a greater sense of duty and obligation to the companyrsquos core mission and that translates to a more disciplined loyal team that will not abandon ship in the face of obstacles

Herersquos a tip I received from a recruiting expert ask a candidate about a challenge they faced which was not their fault See if they blame other people or if they simply acknowledge that it was a challenge explain how they learned from it and focused on how to grow from the experience I believe that most challenges we can partially mitigate and therefore there is always something to learn

In discovering grit in an individual we also look for those who have overcome some element of personal adversity A large institutional investor who manages nearly $100 billion once said to me that he would not invest with a fund manager who has not faced challenges because he believed challenges will inevitably come and he wants to see a track record retaining control and discipline through adversity

Grit comes in all forms and contexts ndash it is often not apparent on resumeacutes which typically highlight onersquos successes and rarely focuses on our challenges Another reason we substantially weight references in candidate selection is because we want to discuss the challenges people have faced and see if there is a trendline of learning and growth from the challenges

Elements of grit that an interviewer can search for regardless of industry include such things as the candidate paying their own way through school coming from a challenged background or whose path to where they are today has not been straightforward The quality of persistence also correlates to the candidatersquos strategic ability to think entrepreneurially in order to improve their situation Did they have the tenacity to stick with something to achieve a certain level of success in a competitive arena such as in sports or music Spend enough time with a candidate

13

and their references and signals of their determination and perseverance should become apparent

Breeding a successful gritty teamFrom a corporate culture perspective we have also learned that grit has two additional advantages First it tends to create a feedback loop with the rest of your team When things get hard it only takes one or two people who refuse to buckle to demotivate the rest of your team to dig deeper Conversely strong leaders can motivate and help the team optimise results particularly managers who are in the trenches with their team and truly lead by example Secondly corporate cultures which embody this quality tend to attract like-minded people creating a steady stream of potential team members with the requisite characteristics Hiring people who do not have the determination to stick to their goals and promises can be poisonous to a culture infecting the attitudes and behaviors of others As food for thought I do not think I have ever met a manager who wished they removed a negative person from their team later than they did

Although the demands on a leaderrsquos time can be extraordinary team building is one of the most valuable

uses of it and it is not something that should be under-allocated time and resources Team building is a long-term investment much like technology and when executed effectively becomes your companyrsquos most valuable asset Creating the right team relies on the proper mix of culture aligned interests communication and structure to get right but in our experience underpinning all of it is this intangible characteristic of grit

Indeed studies by the US Department of Education have found that managers can aid in the development of grit within their team by providing opportunities to take on long-term goals worthy of an individualsrsquo efforts and providing a rigorous and supportive environment to attain such goals Cultivate a culture of grit within your team and you will find your company ready willing and able to conquer the challenges that will inevitably come

My essential takeaways are (i) hire for attitude and work ethic first and (ii) make recruiting a top strategic priority not something to be overly delegated After all team is the most valuable asset to almost every successful business finding and fostering a team with grit can only improve on that success

14


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JOIN THE CONVERSATION

SUPERRETURN

2

SUPERRETURNBrand Strategy Director

Dr Dorothy Kelso

Head of Product Process and Delivery Rosemary Fitzgerald

SuperReturn Series ProducersAbbie Cooper

Svetlana FathersChris HibbertAmelia Offer

Michaela Virtue

Digital Content EditorAnnie Su

Business Development DirectorEmily Porter

CONTRIBUTORSFounder and CEO Star Mountain Capital LLC

Brett Hickey

General Partner Atlantic Bridge CapitalDavid Lam

Managing Partner Arbour PartnersJames Newsome

P3 Top four industries being transformed by the augmentation of humans and machinesDigitalising traditional industries and embracing innovation

P5 Data breaches are going to increase what are you going to do about itWhat you need to do to beat the cybercriminals

P9 Direct lending 20 going far wider and a whole lot more directBetter technology and plenty of data to help you scale up

P11 Grit a key determinant of your companyrsquos successGood things come to those who are sticking it out

CONTENTS

Disruption in the form of technology change and advancement is set to be one of the biggest themes that will shape the private equity industry in the year to come

Technology is continuously advancing and evolving As it extends its influence on more industries than ever before it is on track to gain more interest and becoming more attractive for investments

Other than the availability of new opportunities we will also need to be wary of the implications brought by the digital disruption - how we will need to adapt to the changes and the appearance of new risks that we have never faced before

Will this be embraced as an opportunity or defended against as precaution The innovative responses from private equity will be interesting to watch out for in the year to come

In our first SuperReturn quarterly eBook series for 2018 we focus on the ever-changing world of technology and its effects on the private equity industry

What kind of new risks and opportunities will it bring How should the industry react to the impending changes and maintain its resilience to changes

ANNIE SUDigital Content Editor

INTRODUCTION








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SUPERRETURN


SUPERRETURN

monsters and superheroes · become iron man, innovations such as big data, artificial intelligence,...

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