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Predictability of Investment Performance and the Impact of the Level of CEO's and Partners

Prospective study of 24 companies and 6 private equity firms

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Investors in funds are using past performance of a fund to evaluate future investments. When changes occur and partners leave, or new funds are set up, past record is not always available or is no longer relevant. Considering the results of this research, it must be emphasized that the Level of Capability among partners is a critical dimension to consider when predicting future performance of funds.

Enhancer is a Management Consultancy firm that specializes in how to direct and lead organizations. Enhancer bases its work on scientific discoveries within the field of organization and leadership that relates levels of work within an organization to levels of capability within people. The discoveries are the cornerstones of a systems theory that enables a true holistic approach to developing organizations (Requisite Organization).

In 2002, Sjätte AP-fonden became aware of Enhancer's science based methodology. Sjätte AP-fonden invests in both private companies directly and in Private Equity firms. Sjätte AP-fonden decided to use the methodology to improve its performance and at the same time conduct a study to validate the importance of ensuring that companies have the right CEO and ensuring that Private Equity firms have partners at the required level.

The aim of the study was to explore the possibility to predict future performance within Private Equity investments based on the separation and analysis of two isolated variables. It was assumed that if CEOs or partners, operate on the required level for their Mission, as measured on the Jaquesian scale of levels of work/levels of capability, it will positively impact performance. If CEOs or partners operate on a lower level than the Mission it will negatively impact the whole organization's performance.

Included in the study are companies where an analysis had been made, by Enhancer, to determine the Mission and successively the level of that Mission. In parallel the capability level was determined, so that comparison could be made between the level of the executive capability and the level of the Mission. The study started 2002 and was closed early 2010. At the time of the closing of the study, an evaluation of the companies' performance, was made by Sjätte AP-fonden. In 10 of the 30 included firms the performance evaluation was related to exits.

Results: All 6 Private Equity companies performed as predicted, 3 positive or very positive and 3 very negative. Out of 12 companies which were expected to perform positively, 11 did. Out of 12 companies which were expected to perform negatively, 9 did while 3 performed positively.

The analysis supports the hypotheses, suggesting that by matching the Level of Capability of a CEO with the Level of the CEO role, i.e. the level of the Mission, it will have a significant impact on the PE firm's ROI. It also suggests that investors in Private Equity firms should consider the level of the PE firm's partners when making the investment decision.

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