MCKINSEY ON INVESTING - PERSPECTIVES AND RESEARCH FOR THE INVESTING INDUSTRY NUMBER 6, MARCH 2021
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McKinsey on Investing Perspectives and research for the investing industry Number 6, March 2021
McKinsey on Investing is written Editorial Board: McKinsey Practice Publications
by practitioners in McKinsey’s Pooneh Baghai, Alejandro Beltran
global investor-focused practices, de Miguel, Onur Erzan, Chris Editor in Chief:
including those serving asset Gorman, Martin Huber, Duncan Lucia Rahilly
managers (private equity, real Kauffman (lead), Bryce Klempner
estate, infrastructure, traditional (lead), Hasan Muzaffar, Rob Palter, Copyright © 2021 McKinsey &
asset/wealth managers) and Alex Panas, Vivek Pandit, Mark Company. All rights reserved.
asset owners (pensions, SWFs, Staples, Marcos Tarnowski
endowments, foundations, This publication is not intended to
family offices). Editor: Mark Staples be used as the basis for trading in
the shares of any company or for
To send comments or request Contributing Editors: undertaking any other complex or
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Belinda Yu
Table of contents
4 Purpose for asset owners:
Climbing a taller mountain 28 Lessons for private equity from
the last downturn
In the wake of the pandemic, the Adding value to portfolio companies
world’s long-term investors are and buying cheap still matter.
reexamining their purpose.
10 How private equity can catalyze
diversity, equity, and inclusion 32 Wall Street versus Main Street:
Why the disconnect?
in the workplace Despite turmoil in the real economy,
Private equity has an opportunity the US stock market remains
to transform the global business resilient because of three critical
community and improve returns. factors: the basis of valuations,
the market’s composition, and
investors’ expectations.
14 A playbook for private equity
success: An interview 36 A rolling disruption: COVID-19’s
implications for private equity
with Jean Salata, CEO and and portfolio companies
Founding Partner, Baring The pandemic has triggered seismic
Private Equity Asia economic and societal changes. New
research can help sponsors assess
the strength and direction of these
tremors. to get ready.
22 Why healthy institutional
investors outperform 47 Institutional investing in the time
of COVID-19
A strong mission and excellent Tested by the pandemic, many of
talent management make for healthy the world’s leading institutional investors
institutions—and better investment are demonstrating resilience and agility.
performance.
52 Preparing for private-equity
exits in the COVID-19 era 67 Seeing the savings: Toward
transparent management of
Exits have all but stopped, for the portfolio companies
moment. Leading firms are taking Early in the COVID-19 crisis, sponsors
advantage of the extra time. and portfolio companies collaborated
to find ways to conserve cash.
The next step, delivering the savings,
requires heightened diligence
and discipline.
56 Reimagining the office and work
life after COVID-19 72 Startup funding in logistics
A new report looks at the
The pandemic has forced the adoption impact of new money in an old
of new ways of working. Organizations industry—and what it means
must reimagine their work and the role for incumbents, startups, and
of offices in creating safe, productive, investors.
and enjoyable jobs and lives for
employees.
62 The PE company CFO: Essentials
for success
Private equity portfolio companies
are crucibles for CFOs. Here are
four essential priorities to get started
on the right foot.
2 McKinsey on Investing Number 6, March 2021
Introduction
Welcome to the sixth volume of McKinsey on Investing, developed to share the best of our recent research
and thinking relevant to investors. Colleagues from around the world and across several disciplines—including
asset management, real estate, institutional investing, and private equity—collaborated to develop these
insights. We hope this combination of perspectives will provoke reflection, dialogue, and prove an insightful
guide to some of the best current practice in the investment industry.
We begin with a pair of timely articles focused on how investors can contribute to positive societal change. The
first piece looks into the role of purpose for asset owners, and the opportunities for investment institutions to
use their capital and capabilities to contribute to the communities they serve. The second examines the theme
of diversity and inclusion, and the role private equity firms can play in mobilizing change. Given the events of
last year, there is fresh urgency to both these issues.
We then offer four articles that explore some of investors’ top priorities. These include an interview with Jean
Salata setting out a ‘playbook’ for PE success in China and the results of our recent research on organizational
health for institutional investors. Complementing these, we include a perspective on the lessons from the last
downturn that are relevant to private equity, as well as an article analysing the perceived ‘disconnect’ between
today’s economic realities and the stock market’s recent record level.
Next, four articles explore the implications of the pandemic—on the strategies of private equity firms and their
portfolio companies, the priorities of institutional investors, the preparation for exits, and office and work life.
Finally, we are pleased to include three articles focused on investor portfolio companies. The first considers
the essentials for CFOs in PE-owned portfolio companies to succeed. The second discusses the role of
transparency in the management of portfolio companies. And the third looks at patterns of new investments in
logistics startups.
Please let us know what you think: you can reach us at investing@mckinsey.com. You can also view these
articles and many others relevant to investing at mckinsey.com and in our McKinsey Insights app, available for
Android and iOS.
The Editorial Board
Pooneh Baghai Duncan Kauffman (lead) Vivek Pandit
Alejandro Beltran de Miguel Bryce Klempner (lead) Alex Panas
Chris Gorman Hasan Muzaffar Mark Staples
Martin Huber Rob Palter Marcos Tarnowski
3
Purpose for asset
owners: Climbing
a taller mountain
In the wake of the pandemic, the world’s long-term investors are
reexamining their purpose.
by Duncan Kauffman, Bryce Klempner, and Bruce Simpson
© Michael Schauer/EyeEm/Getty Images
4
The world’s pension funds, sovereign-wealth The power of these three dimensions of purpose
funds, and endowments are no strangers to has afforded asset owners comfort (and perhaps
purpose—they intentionally strive to create positive competitive advantage) in their distinctive purpose
societal impact. After all, they have long been using vis-à-vis other investment firms and financial
purpose as a not-so-secret weapon to attract talent institutions.
while competing with higher-paying private-sector
investment managers. As one chief talent officer Many asset-owner executives may thus feel
of a major asset owner put it, “We can’t compete justifiably proud of their progress on organizational
with Wall Street head-to-head on compensation, purpose. Yet increasingly, partly impelled by the
but we can emphasize the mission of the work global health crisis and partly by other societal
we do: helping millions of our fellow citizens save forces, several asset owners are mulling an even
for their retirements. That’s pretty meaningful.” taller mountain: using their capital, capabilities, and
Nevertheless, amid the pandemic, many institutions influence to contribute to the economic and social
are redefining, or simply sharpening, their emphasis recovery of the communities in which they operate,
on purpose, with promising implications for their so that they can deliver positive social impact
constituents and the societies in which they operate. beyond what they currently achieve.
Experienced climbers Why do more?
For asset owners, purpose begins with their Like many industries with a noble purpose, asset
mandate, one that many owners have taken great owners have a long history of harnessing some
care to define. The mandate informs all strategic of the advantages that come from a strong
choices an asset owner makes, so many CEOs and shared sense of purpose—in talent (recruitment,
chief investment officers (CIOs) are careful to align retention, motivation, productivity), external
their top teams and board. For example, the website engagement (policy and regulatory freedom), and
for the Ontario Teachers’ Pension Plan states, “Our risk management (in their own organizations and
name captures our purpose: to secure the future portfolios). Yet there are three reasons why asset
for Ontario’s teachers.” The Abu Dhabi Investment owners are increasingly seeking to do more.
Authority describes its purpose as “. . . to secure
and maintain the future welfare of the Emirate.” And First, expectations for asset owners are evolving
the Yale Investments Office “seeks to provide high rapidly among stakeholders and society at large. In
inflation-adjusted returns to support the current and the face of the economic volatility wrought by the
future needs of the university.” pandemic, for example, policy makers and citizens
alike are searching for levers to kick-start economic
These purpose statements typically share a activity. That involves asking more of those that are
common concept: asset owners commit to investing able, since the pandemic has exacerbated inequality.
the capital they have been entrusted to preserve, by Asset owners, therefore—who collectively control
enhancing the long-term purchasing power of their more than $20 trillion in assets—are increasingly
beneficiaries. This purpose is noble; it is focused on expected to provide positive societal impact,
helping others—and, in many cases, doing so on a especially given their considerable (direct and
large scale, for millions of beneficiaries or even an indirect) influence on companies’ conduct globally
entire nation. It aims to help others by enhancing and their close relationship to governments and
their autonomy. And it is typically cast as helping to public stakeholders. During the pandemic, some
orient institutions toward the long term—a horizon institutions have begun receiving more requests
in which all stakeholders’ interests tend to converge. along these lines, with speculation that asset
Purpose for asset owners: Climbing a taller mountain 5
owners may be asked to prop up companies of risk-adjusted returns. Asset owners’ collective
social or political significance through equity size affords them a built-in incentive to strive for
injections—hardly an appealing prospect for these broad-based improvements in the economies
institutions, which guard their decision-making and societies in which they invest. As Hiromichi
independence fiercely. A proactive approach may Mizuno, former CIO of Japan’s Government Pension
be the surest way to navigate this fluid situation. Investment Fund, noted: “Our portfolio performance,
particularly long term, is actually the product of what
Second, engaging employees and other stakeholders happens in the global economy. So we just need
on spirited discussions of purpose tend to increase to make sure that the global economy and global
feelings of organizational connectedness, engagement, capital market remain sustainable.” Asset owners’
and loyalty. Infusing purpose is essential for efforts to contribute to society can thereby support
developing and maintaining an engaged workforce, their ability to deliver returns.
as well as for providing a powerful motivator for
those (especially millennials) who seek “more than a Therefore, failing to set ambitious aspirations
paycheck.”¹ Across institutions, employees who feel for their purpose carries a substantial risk for
that meaning is clearly articulated, aligned with top- asset owners—the lost opportunity to help tackle
management behaviors, and embedded into daily some of our societies’ greatest challenges, with
decision making are up to four times more engaged attendant consequences for the fulfilment of their
and three times more excited about work. This is formal purpose.
particularly relevant for asset owners, many of whom
are internalizing their investment programs by hiring How to decide what more to do
and retaining top talent from a scarce pool—and Purpose is a journey for all organizations, one in
more often than not competing against private-sector which the destination should not be predictable or
employers that are able to offer higher compensation. generic. Positive societal impact can manifest in
a multitude of ways, and asset owners enjoy great
Third, there is emerging evidence that investors can versatility and flexibility in their choice of where to
“do well by doing good.” Rather than trading high channel their power. In our experience, there are
returns for social impact, as is commonly assumed, several commonalities among institutions most
strategies designed to deliver positive social impact satisfied with their progress to date.
may be performance-neutral or even deliver higher
1
Naina Dhingra, Jonathan Emmett, Andrew Samo, and Bill Schaninger, “Igniting individual purpose in times of crisis,” McKinsey Quarterly, August
2020, McKinsey.com.
Purpose is a journey for all organizations,
one in which the destination should not
be predictable or generic.
6 McKinsey on Investing Number 6, March 2021
Exhibit
Assetowners
Asset ownershave
havemany
manystakeholders.
stakeholders.
Stakeholder map—both direct and indirect
Direct stakeholders Indirect stakeholders
Client(s) Beneficiaries Civil-society groups Public debate
Board Media
Talent Employees Academics and institutions
Prospective hires Alumni Reality checks
Asset
Suppliers External investment managers Information providers
owner
Advisers and providers of finance Other institutional investors Potential
collaborators
Partners Co-investors Other investment firms
“Investee” companies Other companies
Referees Governments Rating agencies “Standard
setters”
Regulators Capital-market infrastructure
Source: McKinsey analysis
First, they listen so that they can surface and command billions of dollars in financial capital and
explore expectations. They identify relevant an arsenal of talented human capital, and tap into
stakeholders (exhibit) and seek out input on what a reservoir of social capital in the form of influence
positive societal impact the institution could among the companies and societies in which they
and should create. This process is intimidating, invest. Together, these hallmarks distinguish asset
precisely because many of these stakeholders have owners and can form the basis for collective action
traditionally joined with the institutions themselves on important issues such as corporate governance,
in framing purpose narrowly, and in variations on the diversity and inclusion, and climate change.
theme of “delivering returns.” Skillful moderation Witness the creation of FCLTGlobal to encourage
is important to draw out nuanced perspectives. long-term orientation among companies and,
For example, asking stakeholders what they think more recently, the Investor Leadership Network to
others expect—or what society at large expects— pursue concrete sustainability initiatives.
can sometimes be more fruitful than asking what
they themselves expect. The most potent capabilities are often the rarest.
This may pertain to the specific source of an
Second, satisfied institutions reflect on ways to institution’s assets (for example, its beneficiaries).
use their strengths, particularly the subset that is Asset owners should therefore ask, “What makes
unique or differentiating. Large asset owners can us different, and what does that mean for the
Purpose for asset owners: Climbing a taller mountain 7
Successful leaders neither settle
for generic or vague articulations of
purpose, nor do they allow debate
about their organizational purpose to
drift indefinitely.
societal contribution we can make?” Sovereign- regional hospitals. In this way, these institutions
wealth funds can naturally ask, “What more can we fulfill their purpose of helping their members—not
do for the country?” University endowments might only in retirement but also during their working lives—
ask, “How else can we contribute to learning—on by investing in the industries in which they work.
our campus and beyond?” For example, the Yale
Investments Office spurred a seismic shift in Third, institutions strong on purpose tend to
institutional investing, beyond its contribution synthesize expectations and strengths to craft a
to the university’s capital works and operating purpose statement that is specific, authentic, and
budget, by popularizing the use of illiquid asset consequential. In other words, they determine
classes among asset owners; in doing so, it their “institutional genius.” That involves integrating
changed the way asset owners undertake portfolio a cacophony of opinions, during a process that
construction.² Pension funds, many of which have can (and should) feel contested and uncertain.
a membership base with a shared affinity (such as Successful leaders neither settle for generic or
a profession or a place of residence), might ask, vague articulations of purpose, nor do they allow
“How can we help our members beyond being good debate about their organizational purpose to drift
stewards of their capital?” indefinitely. Instead, they lay out a structured
process, build consensus, and drive toward a
For example, Cbus is Australia’s primary landing. More important, they embed the resulting
superannuation fund for workers in the building purpose into the “5Ps” of the institution’s DNA:
and construction industries. Its wholly owned portfolio strategy, people and culture, processes
subsidiary, Cbus Property, is dedicated to making and systems, performance metrics, and positions
direct investments in Australian properties, which in external engagement. For instance, on portfolio
in turn create jobs and shape conditions in the strategy, some institutions have elected not to invest
building and construction industry. That helps in certain sectors deemed inconsistent with their
members not only in the long term, by contributing purpose. Asset owners might amplify their impact
to the portfolio’s risk/return characteristics, but further by challenging their investee companies
also more immediately, by mobilizing capital for to declare a corporate purpose, and to embed it
tangible impact. Similarly, Aware Super, which has with specific metrics and targets. The International
its origins as the superannuation fund for nurses in Integrated Reporting Council (IIRC) seeks to help
the Australian state of New South Wales, is active companies report a holistic view of their overall
in investing in healthcare infrastructure, such as impact, beyond traditional financial statements.
2
avid F. Swensen, Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, first edition, Glencoe, IL: Free
D
Press, 2000.
8 McKinsey on Investing Number 6, March 2021Its forthcoming merger with the Sustainability Initiating a discussion about purpose can feel
Accounting Standards Board (SASB) aims to simplify uncomfortable. It can elicit nervousness, cynicism,
the challenges companies face in this regard. or even hostility, particularly among organizations
with a well-honed sense of their mandate. As
Successful integration of purpose into the a result, many asset owners risk pigeonholing
organizational DNA is ultimately what distinguishes discussions of purpose as CSR or dismissing them
institutional purpose from corporate social outright. To do so may miss a great opportunity—to
responsibility (CSR): it should be the “golden thread” have transformational societal impact—which many
that pervades the institution, not a sideshow—no would agree may be needed now more than ever.
matter how worthy.
Duncan Kauffman is an associate partner in McKinsey’s Singapore office, Bryce Klempner is a partner in the Boston office,
and Bruce Simpson is an alumnus of the Toronto office.
Copyright © 2021 McKinsey & Company. All rights reserved.
Purpose for asset owners: Climbing a taller mountain 9How private equity
can catalyze diversity,
equity, and inclusion
in the workplace
Private equity has an opportunity to transform the global business
community and improve returns.
by David Baboolall, Alexandra Nee, and Lareina Yee
© Peepo/Getty Images
10Business leaders hear a lot about disruption. of the business community. Globally, about 10,000
But 2020 redefined the term. By March, the novel PE firms have more than $3.9 trillion in assets under
coronavirus had completely changed ways of life management (AUM).2 In North America alone, about
and work for billions of people. In May, the death of 4,700 firms own more than 18,800 companies.3 With
George Floyd produced an equally seismic shift in that kind of influence, if PE firms were to continue
cultural awareness of systemic racism and set in to reduce gender and racial inequalities across the
motion urgent calls for racial equity—globally. And companies they control, they could change the face
today, second and third waves of COVID-19 cases of business.
are tearing through many countries, exacerbating
socioeconomic, gender, and racial inequities. McKinsey and LeanIn.org’s new report, Women
in the Workplace 2020, confirms that PE lags
This article discusses how—in the current moment corporate America on gender and diversity in senior
of upheaval—private equity (PE) has the ability and ranks. Our analysis presents overall trends and
imperative to improve diversity, equity, and inclusion averages for the industry, and we fully recognize that
(DE&I) in the workplace; and in so doing, provide some PE firms have made advancements on DE&I.
additional levers for financial outperformance. On the whole, gender and racial diversity at PE firms
Our long-running research on diversity across are stronger in entry-level positions than at the top
industries shows that companies with greater (exhibit). On average at the start of 2020, about 20
diversity in leadership ranks are more likely than percent of senior leaders at PE firms (managing-
those with less diverse leadership to perform director level) were women while the share of women
better than industry average on margin growth.1 on executive teams in the rest of corporate America
Applying this analysis to PE suggests an additional was about 30 percent.4 PE also trails on ethnic
lever for value creation within firms’ portfolios. diversity. In 2020, investment deal teams are about
Improving DE&I will not only provide an additional 1 to 2 percent5 Black in the United States, with other
opportunity for financial outperformance, but DE&I people of color comprising the remaining 11 to 12
commitments may also help firms raise capital. percent of diversity at the managing-director level.6
Public companies do better, with approximately 13
By focusing on DE&I, the PE industry can create percent Black and Latinx executives.7 But that’s still
more equitable and inclusive places to work, attract far below the US demographic composition (about
better talent, redefine corporate culture, and set a 30 percent Black and Latinx in 2019) and also lags
standard for businesses everywhere. behind the ethnic-minority population that holds
a graduate degree (about 23 percent of the total
The opportunity for PE workforce with relevant graduate degrees in 2019).
While the Fortune Global 500 comes first to mind PE portfolio companies’ management teams and
when thinking about the corporate leaders of the boards of directors represent a further area
economy, PE firms and their portfolio companies of opportunity.
have an outsize ability to influence the status quo
1
Sundiatu Dixon-Fyle, Kevin Dolan, Vivian Hunt, and Sara Prince, Diversity wins: How inclusion matters, May 2020, McKinsey.com.
2
PitchBook Data, October 2020, pitchbook.com.
3
Ibid.
4
Women in the Workplace 2020, McKinsey and LeanIn.Org, September 2020, womenintheworkplace.com.
5
Based on active members in the 2020 McKinsey Black Investor Professionals Forum Database. Weighted average of active members as a
percentage of all investment professionals in the more than 150 North American firms represented in the database.
6
Figures from Women in the Workplace 2020 dataset.
7
Ibid.
How private equity can catalyze diversity, equity, and inclusion in the workplace 11Exhibit
Gender and racial diversity in North
NorthAmerican
Americanprivate
privateequity
equitydecrease
decrease with
career advancement.
career advancement.
Private equity¹ employees by level, 2019, %
100 Women of color
White women
80
Men of color
White men
60
40
20
0
Entry level/ Senior Vice Principal/ Managing C-suite Board
associate associate president director director
1
Survey covered companies in Canada and the United States. Eleven PE firms participated in the survey.
Source: Women in the Workplace 2020 dataset
How PE can catalyze DE&I advancements Firms are already moving ahead. Since May 2020,
Over the past five years, McKinsey has studied the we have seen an uptick in the number of PE firms
strengthening business case for gender and ethnic focused on DE&I. Much of that is because the
diversity: companies with greater diversity within energy gathering around gender and racial equity is
their leadership team correlate to stronger financial raising expectations for employers. But institutional
results.8 Companies in the top quartile for gender investors and other limited partners (LPs) are also
diversity were 25 percent more likely to outperform beginning to bring DE&I criteria into their thinking
industry-median EBIT growth than bottom-quartile as they allocate funds to general partners (GPs).
companies.9 Similarly, executive teams in the top Furthermore, as the data show, the push for
quartile of ethnic diversity were 36 percent more increased DE&I could also make financial sense
likely to financially outperform the industry median. for PE firms.
If this business case were to hold for PE-backed While the standard tactics to improve DE&I—
companies, beyond the increased likelihood of including early recruitment and interview prep for
financial outperformance for the portfolio company underrepresented minorities, unconscious bias
itself, a PE fund focused on driving significant training, and inclusivity surveys—are helpful to any
change across the portfolio would produce company, some PE firms are beginning to assert
significant enterprise value for the fund. While it that they can and should do more. A set of tailored
is still early days for PE on improving diversity, and and unique actions can help GPs and their portfolio
the correlation remains to be validated for privately companies improve DE&I in their organizations and
held companies, the scale of potential value creation lead across the business community. Here’s a small
is significant. sample of those actions.
8
Diversity wins, May 2020.
9
Ibid.
12 McKinsey on Investing Number 6, March 2021PE firms can do the following: candidates; they can also add seats to create a
diverse board of directors with relevant skill sets
— Make a public commitment. Firms can, for for their companies.
example, establish an internal council on DE&I
for themselves and their portfolio, with a C-level — Establish diverse management teams. Firms
chair to signal that this matters. The council can can review the diversity of each portfolio
develop metrics, set goals, and monitor progress company’s workforce and management and
on targets for both the firm and the portfolio. identify areas where increased DE&I could lead
to improved culture and performance.
— Conduct diversity assessments of targets.
Firms can include DE&I throughout the deal life — Remove structural racism from all corporate
cycle. Building DE&I criteria into due diligence policies portfolio-wide. Firms can examine
of targets and investment-committee reviews current benefits and corporate policies
can help not only to assess risk but also to and restructure them as needed to improve
understand the value-creation opportunity retention and promote equity in advancement of
inherent from improving DE&I. Once targets are underrepresented minorities.
acquired, owners should include DE&I in the
100-day value-creation plan. And they should These levers are not exhaustive; instead, they are
revisit DE&I as one of the value-creation levers a few of the tangible ways that PE firms can lead in
highlighted for buyers upon exit. the creation of a more diverse, equitable, and
inclusive workplace.
— Focus on diversity performance. Leadership
can review firm and portfolio-company diversity It is increasingly clear that PE’s push on DE&I in
metrics at all partner meetings, and even link this moment can serve as a catalyst, with outsize
a portion of compensation to deal teams’ or impact across the business community, while also
portfolio companies’ performance on these increasing the likelihood of outperformance for
DE&I metrics. early adopters.
Within portfolio companies, advancing DE&I
includes the following steps:
In the coming months, we will continue to share
— Set diversity targets for boards. PE firms have steps the industry can take to improve racial
seats on the boards of most of their investments. and gender diversity within its firms, portfolio
They can use those to position qualified, diverse companies, and as an industry.
Authors
David Baboolall Alexandra Nee Lareina Yee
David_Baboolall@McKinsey.com Alexandra_Nee@McKinsey.com Lareina_Yee@McKinsey.com
Associate Partner Partner Senior Partner
New York Washington, DC San Francisco
Designed by McKinsey Global Publishing
Copyright © 2021 McKinsey & Company. All rights reserved.
How private equity can catalyze diversity, equity, and inclusion in the workplace 13A playbook for private equity
success: An interview with
Jean Salata, CEO and Founding
Partner, Baring Private
Equity Asia
by Ivo Naumann and Wouter Baan
14Jean Salata has watched China liberalize and open momentum as the economy further liberalizes, and
up from his office in Hong Kong for more than 30 as more of the rural economy transforms into the
years, in the process turning Baring Private Equity urban economy, amid a focus on consumption and
Asia (BPEA) from a small private equity firm with the consumer sector.
about $300 million in its first fund to a $20-billion
business. Previously, the economy was largely driven by
government investment, but now consumption
Over that period, BPEA has evolved a distinctive has a much more important role. That is a long-
operational approach involving deep sectoral term theme that will continue to play out: growth
knowledge of the healthcare, logistics, media, in consumption, growth in the middle class, in
education, financial services, and retail businesses technology, and transformation. There’s also a lot of
it invests in, controlled development of scale, cross- capital chasing these ideas in China. The challenge
border expansions, and bolt-on acquisitions. for businesses and PE investors is figuring out
how to invest in an environment where you need
Amid a shifting geopolitical environment in Hong to react very quickly to changes, and locating
Kong and the unwinding of the COVID-19 crisis the intersection between growth, opportunity,
across Asia, Salata spoke with Ivo Naumann, a valuations, and returns on capital.
Shanghai-based Partner who heads McKinsey’s
private equity practice in Greater China, and Wouter McKinsey: There’s a lot of dry powder in the market.
Baan, an Associate Partner in Hong Kong, about the Is the industry disciplined enough to avoid driving up
state of PE in China, including the development of prices as it deploys that capital?
an increasingly active secondary market for private
assets. Jean Salata: Most GPs are very disciplined
investors. It’s a Darwinian business. If you’re not
The conversation covers key trends in the evolution disciplined, it shows up in your returns and you go
of PE deal flow, how digitalization is affecting not out of business. The world today is different in that
just invested businesses but PE firms themselves, we have a very low interest rate environment. The
and why leadership and talent are key to unlocking returns on capital are low. The US Treasury market,
outsized returns. something like a $20 trillion market, is generating
about a 1 percent return for investors. There’s a lot
McKinsey: Private equity has risen rapidly in of capital that used to earn, say, 4-5 percent that’s
China, which is now the third-largest PE market in now getting 1 percent, and so is looking for other
the world, but as a percentage of GDP it remains places to invest. That filters through the entire chain
relatively small. What is your view on the future of of investors, and the investment returns that people
the market? are seeking to generate.
Jean Salata: We’re seeing more buyout transactions The way you generate that return needs to be
and larger deals. Digital transformation and suited to the environment that we’re in today, where
technology are growing in importance, reflecting valuations are high. It needs to encompass buying
the Chinese government’s embrace of the the right company in the right sector with the right
internet, mobile, data, and artificial intelligence – profile and growth, but also a plan to drive extra
technologies that are transforming the way people growth, margin, and exit multiple once you own and
do business. China is at the forefront of adapting have repositioned the business. Investors need to
technology to just about every business in the consider how they can benefit from placing better
marketplace. leadership into a company, or by implementing
digital transformation.
China is the source of the majority of global growth
at the moment, and is still attractive for investors Overall, the industry will continue to thrive because
if you want to be exposed to growth in earnings, there is such demand for generating returns above
productivity, innovation, and capital formation, as
well as returns on invested capital. This is all building
A playbook for private equity success: An interview with Jean Salata, CEO and Founding Partner, Baring Private Equity Asia 15Career highlights
Oversees all investment and divestment decisions,
as well as strategic direction, as CEO of Baring
Private Equity Asia (BPEA), a firm he started as the
regional Asian private equity investment program
for UK-based Baring Private Equity Partners in
1997.
Took Nord Anglia Education private in 2008 and
over eight years drove a 20 times expansion in
EBITDA to more than $200 million, before relisting
the company in the US, and privatizing it once
again in a $4.3 billion deal that involved multiple
BPEA funds.
Jean Eric Salata Led a managemen buyout of Baring Private Equity
Vital statistics Partners’ Asia program to establish BPEA in 2000.
Served as a director of Hong Kong based AIG
Education Global Investment Corporation (Asia) Ltd., the
Received a Bachelor of Business Asian private equity investment arm of AIG.
Administration from the Wharton
Acted as Executive Vice President of Finance of
School of the University of
Shiu Wing Steel, a Hong Kong based industrial
Pennsylvania
concern.
Consulted with Bain & Company based in Hong
Kong, Sydney and Boston.
and beyond what is available to public market McKinsey: Over the past decade we’ve seen more
investors. If PE can continue to add value to the control groups and majority stakes, compared with
companies that they invest in, then investors will still the previous decade. What are some of the other
benefit from the kind of illiquidity and alpha creation differences or opportunities you expect to see?
that happens through a PE strategy, provided it’s
done in a disciplined way. The industry in Asia is Jean Salata: We’re very paranoid about falling
far more sophisticated and advanced than it was behind, and making sure that we’re doing things as
20-30 years ago, when it was really a cottage well as anyone else, particularly if you look at global
industry. Today, we have all the tools, as well as benchmarking. Historically, PE investing was very
experienced GPs and service providers, that help passive in Asia. That moved on from being minority-
support our investment decisions. We have a very type passive investing to more activist, majority-
well-developed financing market to provide, the type investment. The logical first thing was putting
financing for the investments. We’re also seeing the financial leverage into deals and companies where
emergence of more control-type investments where, you can control cashflows and generate a better
as an investor, you can really have an impact on the equity return than was previously the case.
business, rather than being a passive investor.
16 McKinsey on Investing Number 6, March 2021People then developed capabilities to work with Sector focus is also becoming increasingly
companies and improve operations, or shape important. The generalist approach is the logical
the strategy of the business, including through way to start a business in our industry. But as we
better leadership. A lot of this boils down to who is become more sophisticated, as the businesses
running the company, what kind of management become more competitive, you need to have those
teams, independent chairman of the board, or non- deep insights that you get from being a sector
executive directors do you have to help guide these specialist, as well as the industry relationships that
companies? Leadership has been an area where enable you to quickly bring in the right management
we’ve seen a lot of development and improvements. teams, advisors, and diligence experts; all the
people that help you make the decisions in order to
The other related point is we’re seeing more CEOs be competitive in buying a company, and to hit the
and management teams that have previously ground running once you have bought the business.
worked for sponsor-backed companies. This is
their second or third deal. It’s refreshing to work McKinsey: How well equipped are firms to deal with
with people like that, because they understand these shifting requirements?
the drill. They understand our playbook, and what
our objectives are. They’re totally aligned. Many of Jean Salata: We’re in a difficult environment
these people have already become fairly wealthy as now, as we were in 2008-09 and in 1999-2000.
management or successful CEOs, so they’re able to Those environments come and go, but generally
co-invest with us in our deals as principals. We’re all businesses thrive, or fail, because of internal
thinking about the same issues. That’s been a big issues. Culture, people, and the way you run your
change that will continue. business is so important. It’s all about your people
and the capabilities that you’re developing. As a
We’re already seeing more trade sales rather learning organization, one of our values is humility.
than IPOs, alongside the impact of digitalization. We need to admit that we don’t know it all, and that
COVID-19 has accelerated what was already an everybody’s making mistakes relatively frequently.
ongoing digital transformation in the US, and the The point is to understand those mistakes and how
rest of the world, including Asia. That’s going to we can do things differently going forward, and
continue. You’re probably going to see more use of transmit that learning across the organization. We
data and data analytics in both the way we run our emphasize having an open culture and discussions
business, as well as the way that companies run around learning. Learning from mistakes, and
their businesses. celebrating successes.
We’ve recently brought onboard internal resources Agility at the organizational level is also important.
that understand both the data analytics side, but I’ve always believed in diversity in an organization
also the infrastructure, the piping that’s required because of the way we operate across so many
in order to collect the correct data, and to evaluate countries and different jurisdictions. It’s almost
a company when you’re buying it, and whether or imperative that we have language skills and different
not you have the systems in place to collect the cultural backgrounds. We have a large number of
information that you need to be competitive. female partners in our firm, both junior, mid-level
and senior-level, who bring a different perspective,
It’s that transformation from being just a digital and make us a more effective organization.
business where you sell stuff online, to actually
using information that you’re collecting from your We have also embraced working with industry
customers, suppliers, and competitors in a way that experts. Coming from a consulting background
enables you to make better decisions. We’re at the myself, I think the consulting framework–defining
very infant stages of that as an industry, and we are a problem and how you’re going to approach an
pushing ourselves to do more.
A playbook for private equity success: An interview with Jean Salata, CEO and Founding Partner, Baring Private Equity Asia 17issue, before pulling together all the data and the in one or two areas that there’s an opportunity to
resources to address that–is very important. show some results. Then it’s about getting the right
people and matching those objectives with talent.
In addition to that, there’s so much value in finding The other issue is how quickly you’re able to do this.
people that have worked in industry who are Oftentimes, it’s a year before you’ve gotten the right
operators in a particular kind of business, or country people into the right positions, and the right plan in
environment. That can really help you to manage the place. That’s too long.
business.
You need to develop a thesis, and have a very
We work with a lot of industry people pre-deal, as detailed blueprint ready, pre-investment. Post-
well as post-investment, to do the due diligence, to investment, you quickly get the management team
get a view on the business, and also to help us find on board, modify the plan and start implementing,
the right management team. COVID-19 is going to getting the right people in place within the first three
be a defining period for a lot of firms and companies. to six months. If you hit the ground running and are
How did you manage through it? What steps did you at takeoff speed in the first year, then generally the
take? How are you coming out of it? The bottom line investment is off to a good start, and that helps a lot.
is people and organizational culture, and how you
get the best out of people in your organization. Getting the digital and data piece right is also going
to be an important part of alpha creation for most
We found it energizing to be in crisis mode as a businesses. Some of this relates to how you’re going
team, working much more closely together than to exit the company, and whether you can scale
we do during normal times. In a way, it pulls people the business up dramatically through bolt-ons, or
together and enables you to make decisions that create a larger scale business with better operating
would have otherwise taken months or years. You’re leverage, margins, and valuation multiple as a result
able to do it immediately, because there is a sense of organic growth. Maybe you will need to reposition
of urgency. Now we’re trying to capture that sense the business.
of urgency and redirect it at the recovery, and the
new alpha. Where do you go from here without We’ve invested in companies where we went into a
losing that intensity? That intensity is very powerful, lower growth, more commoditized-type business.
if you can mobilize and harness it. We shed some of the lower-margin business lines,
and focused on areas like electric vehicle supply
McKinsey: You referred to creating alpha by being chain, or aerospace, or medical equipment. Higher
more involved in value creation, compared to margin, high growth.
minority/growth-type investments in the past. One
element that people always ask is, “How do you You not only change the margin structure of the
actually build operating groups or value-creation business, you also change the multiple by entering
portfolio groups?” higher margin, higher growth businesses. The
rubber meets the road on the actual implementation
Jean Salata: There’s no silver bullet, but you start of these plans. How you execute, and how long it
with a framework. We have a playbook, we call it takes you to execute, because we’re all operating
the Baring Management System, the BMS, that has against the clock.
six different modules. The key is to focus on one, or
two, or three important levers rather than trying to McKinsey: One thing that we observe is an
do too many things at once. There’s a saying that increasing concentration of fundraising in a smaller
we have: “Think big, but start small.” So, have big set of funds. LPs are trying to narrow down the
ambitions, but start with some relatively small initial number of funds they are investing in. What’s your
steps that you can accomplish quickly. It’s generally
18 McKinsey on Investing Number 6, March 2021outlook for this, and what are some of the things that debt capital raising for our portfolio companies, as
GPs should be doing in order to be on the positive well as the exit strategy planning.
side of this trend?
We have a weekly meeting where we discuss signals
Jean Salata: It’s the evolution of the industry we are receiving from our teams around the region,
to some extent. It’s a bit of a bubble. You’re which enable us to decide whether to lean in to
always going to have some very specialized, certain situations, or to avoid things that don’t feel
entrepreneurial, younger, newer firms that are on right. Then there is the move the needle point: If you
the first or second fund, or more boutique-type are an LP and you have a large program, you need to
operations, where younger teams are growing and have relatively large commitments in order to move
generating great returns, and are doing more niche the needle on your own program. You also want to
strategies perhaps, or smaller deals. Then there avoid being overly exposed to any one fund, so you
is a lot of movement towards, and benefits from, a generally need to be in larger funds, larger programs
concentration of larger funds that are able to build in order to accommodate the size of commitment
scale in their own organizations, but also go after that you want to make. Most LPs are resource
scale assets and drive change in the businesses that constrained, so from a productivity standpoint, they
they invest in. The mid to large end of the market in want to have larger relationships with your GPs.
some respects is less competitive, because there Increasing productivity works in everyone’s benefit,
are fewer buyers for those assets. They tend to including ours. There are benefits to scale, and I
be extremely disciplined buyers. When you have think this trend will continue.
billions of dollars at stake, you are not creating a
very diversified portfolio where some are going to A counter-argument is that if you get too large, you
fail. You make sure every single investment is going start to see diminishing returns as investors get
to be fine or good. Generally, most players at that too big. You can’t manage so much money, it’s hard
end of the market are pretty careful about the way to deploy, or you get too conservative, and take
they underwrite, which creates a self-regulating less risk. I have not seen that personally. There
discipline in the market. As the deal size increases, are certainly some smaller funds that generate
you generally have fewer players. The deals are really huge outperformance related to one or two
more intermediated, but you’d be surprised at home runs, or that sort of thing. But if you look
the number of deals that we see that are not at the expected return and the absolute return
intermediated for a variety of reasons. It’s a more dollars generated in our industry, it’s going to come
bilateral-type situation. It could be a take-private, it from larger firms across the board. That ability to
could be a company where there is a pre-existing generate consistent returns on large amounts of
relationship, or it could be a strategic discussion capital, and to let that compound over time, will
where you have an asset that you could combine have the largest absolute dollar-weighted impact on
with the business. There’s lots of reasons why things investors’ PE allocations, as opposed to a smaller
don’t always go the auction route. outsized return, which doesn’t have as big of an
absolute impact on your program. That will continue.
You need some scale in order to do things like
building internal, sector, operating, or technology The other thing we’ve seen is institutionalization
capability. For example, we have a very large debt of our asset class. It’s not as much of a cottage
capital markets team, internally. It does a lot of the industry anymore. We are still in the first generation
of many firms. Even in the US, most founders are still
A playbook for private equity success: An interview with Jean Salata, CEO and Founding Partner, Baring Private Equity Asia 19running their businesses. But you will see in the next public companies, or were originally public, that
20 years a generational change happening pretty have been marked down dramatically in price, and
much across the board in the developed markets, where there’s an opportunity to do a take-private
and starting to happen in Asia as well. That is with one of your own portfolio companies. We’ve
exciting – the idea that you can create an institution seen that as well. As people do more buyouts,
that outlives a founder generation and create a then one PE firm buying from another PE firm will
really lasting business, like McKinsey. become increasingly common. That sounds like a
low-return strategy, or a hard to understand market,
That means you have to think about how you but it’s not. Like in the stock market, people buy and
institutionalize your management team, the sell stocks all day long from one another.
depth you have, and the systematic approach
that you take; how you systematically approach There are IPOs, which are primary issues. But most
your business and build the lasting agility and of the market trading is secondary in nature. The
ability to innovate while bringing in great, talented, same thing happens in private markets. The assets
young people into your organization. What sort get bought and sold for a variety of reasons. It’s not
of recruiting and training programs do you have? always because one fund feels like the returns have
What sort of HR team do you have? How do you been maximized so it’s time to sell. It’s generally to
motivate, and share the economics with a younger do with the lifecycle of an investment. You have a
generation? All of these things are critical. The thesis, you go in and you build it and you have a fund
bigger firms are in a better position to do that over life of say, 10 years. You have an investment horizon
time, and to grow and institutionalize. of five or six years. There comes a point when it’s
time to sell, you’ve made your money and you move
McKinsey: How do you see the variety of deals on. Generally, those assets perform quite well
being done and the amount of companies becoming through the second wave of ownership and even
available for PE investment changing in future? beyond. Related to that, there will be an increasing
amount of transactions that involve companies
Jean Salata: Deal flow developed from being a
where corporates decide that they have had a
minority/growth capital industry where companies
change in strategy and they want to divest.
needed equity capital to expand their business
to include everything from generational change In the current environment, there may be more
to corporate divestitures. In the COVID-19 period, carve-out opportunities because people may have
we’ve seen big market dislocations creating liquidity or short-term dislocations on their balance
opportunities with take-private situations. That’s sheet. That’s quite interesting from a PE standpoint.
an area we see cyclically in emerging markets Also, the geopolitical realities of the world today are
such as Asia, which tend to go through periods of a major issue for all of us. It creates opportunities in
big. Liquidity comes in and then goes out in waves. that people may want to decouple. People may want
When liquidity dries up, markets fall, and companies to refocus on one geography versus another, and
become distressed. For example, the banking sector maybe exit one geography as a result of geopolitical
in India at the moment is quite distressed. issues. You’re certainly seeing deal flow from
continuing generational change happening at the
There are a lot of public companies where
large buyout end of the spectrum. You’re seeing
evaluations have halved, or more, as a result of
more cross-border-type deals where a company
stress on the system. You also have people that own
is starting to globalize, and needs to grow their
companies in their own portfolios that have become
20 McKinsey on Investing Number 6, March 2021footprint beyond Asia, and either become part of a to thrive under more concentrated ownership.
global business, or themselves acquire something Management teams are very motivated by that. They
that’s more global in nature. see that they’re going to get more attention, more
capital support, and will become more efficient
PE is also better understood now than it used to and competitive with an owner that’s focusing on
be. Generally, there is increasing acceptance of the one asset, as opposed to being part of, say, 200
role that PE can play in rejuvenating and revitalizing subsidiaries. There’s a variety of areas around the
industry; in helping conglomerates that have region where we’re seeing more and more deal flow,
probably too many subsidiaries shed some of the and I expect that to continue as our industry grows.
non-core businesses, and allow those businesses
Ivo Naumann is a partner in McKinsey & Company’s Shanghai office; Wouter Baan is an associate partner
in Hong Kong.
A playbook for private equity success: An interview with Jean Salata, CEO and Founding Partner, Baring Private Equity Asia 21Why healthy institutional
investors outperform
A strong mission and excellent talent management make
for healthy institutions—and better investment performance.
by Bryce Klempner, Bill Schaninger, and Elizabeth Skovira
© Cavan Images/Getty Images
22In a time of extraordinary turbulence, institutional The survey results show that what matters most to
investors are searching for sources of stability. Our achieving net investment returns is creating the right
research has long indicated that, for organizations talent environment—one in which employees feel
in every industry, the key to unlocking stable and connected to the organizational mission, supported
sustainable performance is not to focus simply on by leadership, guided in career development,
results. Instead, the breakthrough comes when and entrusted with autonomy. Hiring exceptional
management applies equal rigor and resources people is of course a big part of success—but
both to how they make money and how they run the helping them develop and thrive is also vital. It
place—what we call organizational performance and suggests that when an institution’s leaders involve
health. We measure it through the Organizational and empower employees through communication,
Health Index (OHI). Across industries, those consultation, and delegation, great things happen.
organizations that emphasize health deliver a total Those qualities have never been more important
return to shareholders that is three times greater than now, when COVID-19 has not only affected the
than their peers. investment environment but also challenged how
investors operate—and underscored why their work
How does organizational health translate to is so meaningful.
the financial performance of the world’s most
sophisticated public investment funds? To In this article, we will review the research and outline
understand more about health and performance the ways institutional investors can focus on the
at institutional investors (public pension funds, practices most closely linked to success.
sovereign wealth funds, endowments, and the
like), we surveyed nearly 5,000 employees at
23 global institutions that collectively manage Why health is important
nearly $4 trillion in assets, using OHI. We sought The search for returns has become much more
to understand employees’ perceptions of their complicated as investment returns have become
organizations’ health and its drivers. We increasingly challenged and investors have been
then considered the findings relative to tested by market volatility. Many pensions and other
investment returns. institutional investors set performance expectations
decades ago, when low-risk asset classes offered
The key finding is not shocking, but to our high single-digit returns. Riskless returns at those
knowledge has not been empirically demonstrated levels are long gone, but the assumption that they
before: the better the organizational health, the will persist is built into the actuarial models of
higher the investment returns. Our research showed many, if not most, institutional investors. As such,
that the degree to which employees believe in their investors must take greater risks to meet their
fund’s organizational mission and the quality of its expectations. Institutions have moved into diverse
talent-management practices were even stronger asset classes, in which success demands an ever-
statistical determinants of investment performance expanding array of skill sets and experiences. All of
than financial incentives. Whereas investment this has stretched the organization and increased
leaders are, at times, prone to writing off the “soft” its complexity, even as resource constraints and
elements of running an investment fund, indeed they growing public scrutiny have tested it in other ways.
matter. We recognize that 23 funds represent only a
slice of the full institutional-investor landscape, that To understand how the organizational health of
net returns tell only part of the performance story, institutional investors is evolving in this environment,
and of course, that we cannot demonstrate causality we turned to McKinsey’s OHI survey. We surveyed
between organizational health and performance. all employees of the institution, then calculated
But our experience in the field suggests that the link scores for its overall health, its nine health
is strong, and it is likely that strong organizational
health helps support outperformance.
Why healthy institutional investors outperform 23You can also read
