Are standardised, well-designed tests enough to identify leadership characteristics? It is true that psychometric tests seek to identify and evaluate values, personality traits, intelligence, and competencies. But what they don’t do is evaluate these traits to account for the fit of individuals into teams and, by extension, their differences in behaviour.
Over the years Drax has worked closely with private equity investors across the small cap and large cap universe to understand the requirements of individuals in their portfolio companies’ leadership teams. We learned that even the most qualified executives don’t always succeed. To this end, we began a process to understand why some individuals thrive in this environment where many others fail.
What we found is that team complementarity is essential when deciding on the final placement. We took this insight and turned it into a deliberate methodology and a suite of products:
- Our Leadership Dynamics Evaluation breaks down the traits and experience of the team into four component areas – Situational (how a company changes and creates value), Domain (what a company does), Functional (what an individual does), Behavioural (how an individual operates).
- Our PACE Evaluation, the behavioural element of our Leadership Dynamics platform, profiles the incumbent leadership team and the candidates against the four key behaviours of Pragmatism, Agility, Curiosity and Execution.
Developed in collaboration with leading occupational psychologists, the PACE Model of Development is Drax’s method of evaluating the behavioural traits of successful leaders. Benchmarked against more than 2000 senior leaders, the model measures those behaviours proven to correlate with successful value creation by senior leadership teams.
What’s more, we know that there are only a few thousand private equity-backed businesses in the UK which in terms of total businesses is a single digit percentage. So, what we’ve done is focus on a very specific environment. Our expertise is deep and narrow.
As a result of this work, the PACE framework came into being. It’s an assessment that’s purpose-built to test the key behaviours of Pragmatism, Agility, Curiosity and Execution, in a business context, enabling an accurate evaluation of an individual’s behavioural traits when working in a leadership position.
Arriving at the framework
When developing the model, we first wanted to understand the relationship between behaviour and performance. To do this we ran a typical behavioural assessment across a group of chairmen, all of whom had exited on more than one private equity journey. The group was diverse with different experiences.
Next, we built evidence to support the theory that specific, measurable behaviours materially impact value creation. Data analysis was conducted on over 1000 private equity executives against 35 behaviours immediately before they started a private equity journey. Notably, 13 out of the 35 behaviours analysed demonstrated a strong correlation between the leader’s behaviour and the performance the business went on the achieve.
We then performed a qualitative study to support the quantitative research already undertaken. This meant engaging with over 50 CEOs, CFOs and Chairs, as well as investment directors. It is the largest known survey of private equity executives to date. We also partnered with the Work Psychology Group (WPG) to further our research into the behaviours of the most successful leadership teams. WPG are well versed in research and the creation of behavioural assessments – such as those used in the NHS to assess medical students’ suitability to different disciplines.
Creating a PACE assessment
Once the behaviours were identified we needed to test our theory in the market. We did this in two ways. The first was to collaborate with UCL’s Head of Psychology and renowned occupational psychologist, Adrian Furnham. He reviewed and amended the PACE behaviours we had identified and confirmed from an academic perspective that these behaviours could be key driving factors to the success of leadership teams.
He continues to review our work regularly and guides the development process to ensure that the output of PACE is professionally accurate.
The second way we validated the assessment was to gather feedback from investment directors, executives, and non-executives in private equity regarding their view on the framework and how it applies to their circumstances. Almost 2000 individuals working in private equity engaged with their feedback, making it the largest sample base for any leadership behavioural research project carried out to date.
So, our validation method has been levelled in two areas: among academics and among investment professionals.
All of this research has served to underline the importance of our four PACE categories of behaviour as the key ones that differentiate successful teams from their peers.
We have ongoing projects to further develop the framework whilst also investigating new areas and behaviours to understand the potential and effectiveness of a leader in private equity.
But in endeavouring to understand why some individuals thrive in this environment where many others fail, PACE is the behavioural assessment tool that provides a large part of the answer.
