Do kind businesses make attractive investments? Ian Moore, partner at private equity firm CBPE Capital discusses the evolution of private equity and why kindness and culture are strong indicators of whether a business is worth investing in.
This discussion is part of our series on the Economics of Kindness. Find out how we're changing the way that business sees kindness in the workplace.
The idea that investors don’t care about kindness is nonsense. Yes, investors are looking for good revenue growth and healthy returns in terms of profit margins, but those features are just indicators at a point in time of a good business – and you don’t achieve any of them on a sustainable basis without the right culture in the business. Kindness can often play an integral role in that culture.
Many years ago, an empirical study led by one of our investors, Pantheon, looked at 20,000 private equity investments and analysed which factors most closely correlated to successful outcomes. The most important factor was the price paid by the private equity investor on the way in, but second was the amount of time that investor had spent getting to know the business and people before the deal was signed.
That study resonated with me. It’s especially true in the mid-market which we operate in at CBPE, where we’re investing in small to mid-size businesses that are earlier in their corporate journey and may be less well developed in terms of financial reporting. We do all the formal diligence, of course, but we also spend a lot of time with the people we’re investing in, to understand the culture and what motivates them.
We want a truer sense of what that company’s culture looks and feels like, and to understand whether employees enjoy working there. Employees who care more about their job and feel well looked after have multiple benefits - it means lower staff turnover and higher productivity for example – and often therefore a more resilient, more successful business with higher growth potential.
When we spend that time getting to know the culture, we often find kindness to staff, clients and other stakeholders is a key factor in sustaining the performance of the business over the medium to long term.
"When we spend that time getting to know the culture, we often find kindness to staff, clients and other stakeholders is a key factor in sustaining the performance of the business over the medium to long term."
The profit-over-everything stereotype is dead
Relatively speaking, private equity as an asset class hasn’t been around that long – but things have come a long way in that time. If I think back to my first interview at KPMG in the 90s, at no point did I ask, “what are your values” or “how do you approach ESG”. I just wanted a job that paid me enough to pay the rent and have a pint at the weekend.
When I lead the interview for the equivalent role today, though, the candidate will challenge me on our purpose and our values. The salary needs to be fair, but it’s not about the money or how quickly they’ll climb the ladder – they’re more interested in how we help businesses grow sustainably and what our values are. They want to understand the culture at CBPE.
A culture of kindness
Kindness isn’t only important at board level or in senior leadership teams, though – it extends throughout successful companies.
The Côte restaurant group, which CBPE backed, is a great example of how kindness can permeate throughout a whole organisation. Côte’s mantra is effectively, “if something goes wrong, we’re going to turn that into a positive experience”.
If they get your order wrong, for example, they’re firstly going to be really up front with the customer about it and take ownership. Then they might say here’s a free bottle of wine, too.
That negative experience suddenly becomes a positive one and, before you know it, you’re a loyal, repeat customer. It’s not just about being charitable and giving away a free bottle of wine, it’s about the bigger picture – treating your customers in a kind way, and as human beings. It’s smart business.
I’ll also mention Mindera, a software development house we’ve invested in that is completely ‘self-organised’. I’ve invested in all sorts of companies and cultures, but Mindera is special: they have no job titles, no org chart, no objective setting and no annual appraisals. They don’t believe in any of it.
On the one hand that sounds like chaos, but on the other they’re giving people an unprecedented level of responsibility to take ownership and manage their own careers. They’re treating staff like adults, with real kindness, and the buy-in is phenomenal – people love working there.
And that approach is paying off financially: the company will grow by 30% this year while the rest of the market is flat. Since it was founded in 2014, Mindera has never lost a customer – so its own clients are clearly buying into its culture, too.
Successful companies like these are also avoiding short-termism and the trap of thinking kindness should take a back seat in tougher times. They know that, if anything, now is the time to double-down on kindness – and they hope the trust, looking after their people, and strong relationships they’ve built will help see them through a tough macro environment.
If kindness is a genuine part of an organisation’s culture, and if senior leaders demonstrate it through their own actions and behaviours, that flows down to the teams below and leads to better business outcomes. Investors don’t need to choose between kind companies and successful, high-potential ones – they’re often the same thing.
"Investors don’t need to choose between kind companies and successful, high-potential ones – they’re often the same thing."
About the author
Ian Moore is a partner at private equity firm CBPE and member of the Investment Committee, leading highly successful investments across the business and financial services sectors with companies including Centralis, JTC and Xafinity.
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