Investing can be a complicated, difficult process. So what traits should you look for in a private equity firm? Industry knowledge, flexibility, and openness are just a few.
Private equity firms can focus on a variety of areas, including global financial services with a company like J. Christopher Flowers’s J.C. Flowers & Co. or growth-oriented consumer companies with Scott Potter’s San Francisco Equity Partners.
But the traits to look for are fairly similar across the board, according to Jonathan Grabel, the CIO of the Public Employees Retirement Association of New Mexico. In an article for Chief Investment Officer, Grabel notes some of the most important qualities in a solid private equity firm:
- A firm with a “great culture.” This is where management fits in. You want a company of insightful individuals who collaborate to make the best investments possible. They should acknowledge mistakes with openness and continually reassess to make the best of the investments in their hands.
- A firm that focuses on the long term. A private equity firm should make investments based on long term goals, not just a quick fix. A team should be involved with both the origination and the execution, not just an individual transaction.
- A firm that is open to change. New technology and investment options become available all the time. The internet has revolutionized the way we search for and use information, especially in the investment world—huge amounts of financial information are available quickly and easily. The trick is knowing what to focus on. That’s where a high quality private equity firm should excel.
- A firm that is hungry to build the right portfolio. Imprudent risk is off the table, of course, but as with any sort of investment, some risk-taking can bear fruit. A good private equity firm should know its portfolios intimately, as well as knowing when to drop investments and pick up new ones. Knowing how to limit loss and expand on success is an important skill for this kind of firm.
Given how much is riding on a private equity firm, both financially and in terms of reputation, it behooves the good ones to provide a solid service based on industry knowledge and the ability to roll with whatever the financial world throws their way.