Competencies, Clusters, and Skews in Private Equity:Exploring the Investment Professional Competencies that Distinguish Extreme Outperformance at One Leading PE Firm

Abstract

Using the real-world laboratory of one leading private equity (PE) firm, this paper attempts to directly connect professional competencies to performance outcomes, and more specifically, to skewed performance distributions. Though no published studies appear to focus on the shape of PE return distributions, data presented in multiple studies indicates that returns are right skewed at the levels of funds and individual portfolio company investments. At both levels, a small percentage of actors drive an outsized portion of returns. This paper finds that within one leading PE firm, this right skew exists at both the levels of individual investments and investment professional portfolios. The paper then leverages methods from organizational behavior, finance, and statistics to identify the mixes of investment professional competencies that distinguish right-tail outperformance within the firm, and then attempts to link these to investment outcomes. The paper finds that professionals who lead outperforming investments tend to excel in three different clusters of competencies and related style elements (identifiable behaviors that may be based upon groups of competencies), that they display more robust and varied toolkits within each cluster than do professionals who lead underperformers, and that these mixes of competencies contribute to investment outcomes in identifiable ways.