by John Eales
18 October 2018
The world of private equity is complex and competitive, and not for everyone. Within that world some personality types seem more predisposed to success. Raw IQ is an obvious requirement, but among the best exponents, so is quirkiness.
Mark Carnegie brings an eclectic skill set to his passion for the different yet linked worlds of investing and deal-making. One is about growth, the other about an immediate outcome.
About 10 years ago, my business, Mettle Group, was sold into Chandler Macleod and eventually into a Lazard Carnegie Wylie PE fund (the Chandler Macleod investment achieved just under a fivefold total return for the fund). I didn’t deal directly with Mark, but his presence on the deal, and on the successful rehabilitation of Chandler Macleod as a business, loomed large.
As you would expect, he has some interesting insights into the leadership required for success in private equity.
Why is leadership important for an investor or deal-maker?
What is embedded in leading an investment in an organisation is different from leading a deal. Both of them require teamwork, but there are situations in a deal that there are not in an investment. If you think about an investment and the evaluation of the opportunity, you need a group of people with different expertise. I focus on the idea James Surowiecki has about the wisdom of crowds – that if you’ve got a fully functioning team and you can get the collective intelligence of the team to work, you’ll end up with way better outcomes than you ever would on an individual basis. I don’t think you need a huge number of people in an investment business but you certainly need two or three.
How formal do those teams need to be in investment businesses and are they similar for transacting a deal?
I don’t think they need be too formal. I think they’re really the same as the chemistry of sporting teams. When I was rowing, the chemistry thing was the weirdest thing. I’d love to be able to figure it out. What we do know is in the whole idea about wisdom of crowds and collective intelligence; it does matter. Whereas with deals, the best guy I ever saw was absolutely a lone ranger. He had two completely different styles. When he was chairman of an investment group he was different from when he was in a room trying to get a deal done –he was absolutely just a samurai warrior on his own.
Do you identify yourself more as an investor than a deal-maker?
Without a doubt. You know, I’m okay as a deal-doer but I would certainly not put myself in the top rank of people, whereas I feel as an investor over a long enough period of time I’ve done my 10,000 hours.
So in your team you are just one of the key people contributing to the collective wisdom?
I hope so. I hope my years in investment businesses have allowed me to find some way to try to listen to the good ideas and let them bubble up, as opposed to just being thuggish and pushing my view down the throat of people.
Is the team in your present investment business fixed or one you patch together as required?
I’ve always said I’m a financier, I’m not an industrialist. Some private equity guys take the view that it’s our way or the highway – we’re going to take control, we don’t want co-investors unless they look like us. I’m very much of the view that we’re happy to be the financiers. We’ll do what financiers can do, but we want to deal with experts and industrialists in each one of our businesses who really know more about their business than us, and hopefully we can bring some part of this collective wisdom to the party.
You are seen to have an eclectic view of the world. From where did that originate?
I was a failed zoologist to start with, so I needed to think about what I was going to do to make a successful career as my talents weren’t in research science. I think I am genuinely wired to be interested in a number of things. It didn’t all come together for me in an intellectual framework until I read [US investor, businessman and philanthropist] Charlie Munger’s work on the 100 mental models. It allowed me to say, actually you’re not a scatterbrain. There is a method to thinking about a latticework of ideas from geology, literature, mathematics, zoology that you can bring to bear on investment problems. The wider you read and the more interested you are in the world, the better you’re going to be as an investor.
There is a lot of psychology in investment. How do people control their instincts?
Well we don’t; it’s human nature. [Former US treasury secretary] Robert Rubin in his early work makes a really good point, which is that ultimately everybody is legislating in the rear-view mirror. And while you’re looking at how you’re going to protect yourself from what happened the last time, the new thing that’s going to bite you on the arse is coming up out of nowhere. It’s always really, really easy to see how the guy who lived 50 years ago is an idiot. It’s very hard to work out the different ways we are going to look like idiots.
When you are canvassing a potential investment with your investment committee, how do you protect yourself from your own biases?
It is really hard for people to say “I’m guilty” of bias. The best available research is that you can’t unlearn it, you can’t unwind from it, you’ve got to have a checklist. And I have a checklist on the wall in the office, but can I get the people who work for me to actually focus on it? There’s the whole “I’m smarter than the average bear; I’m not going to make these mistakes.” You can’t get them to unlearn it no matter how much you try.
Is there a specific personality that is typically drawn to the investment world?
My friend Tom Attwood, who founded and ran ICG, a big mezz fund [a hybrid of debt and equity financing] in the UK, said to me there was not a guy who was working in his business when he left who didn’t have 20 IQ points more than he had and wasn’t 100 times better trained. He wouldn’t have got a first let alone a second interview, and it was inconceivable he would have been employed by the business he started. But he and the guys had one thing: they were the pirates and the current generation are the navy. They were doing it because they were weird people, idiosyncratic, and I hope I class myself in that bucket.
Now, you get the naval graduate equivalents in finance who come in because it’s the hot thing to do. Some of them are seeking money, some the status etc. And the ones we’re trying to find are the people who are intellectually curious. They genuinely find fascinating the business of thinking about how capitalism works, how sustainable competitive advantage works, how the dynamics of human beings work etc., and those are the people you’re looking for – the intellectually curious.
What do you think is your leadership blind spot?
Unequivocally, I have not been able to find a more methodical way of communicating my thoughts. I don’t think there’s anybody who would say they can follow my chain of reasoning. And I have tried to rewire my head, to find a better way to take people with me, but to this day I continue to fail to do that. So, I’ll be making a point and people will think “Mark’s on a rant again” because I have failed to take them through the step-by-step logic. If I can’t bring people along it just creates huge problems. My problem is I do a huge amount of this intuitively and I can explain it logically from the end, but going through the path I can’t articulate what hypothesis I’m trying to work out.
Your father, Sir Rod Carnegie, was a famed businessman himself. How do you resemble him and how have you chosen to be different from him?
His world was about trying to run scale organisations and so was far more tidy as he was trying to get armies to march, whereas I’m trying to get a chamber orchestra to play. I’m attracted to smaller groups – less than a dozen people for the critical decisions, and usually three, four or five. Dad was trying to get hundreds of thousands of people to work in unison.
The second part is I’ve always been attracted to what I call the attacker hand in business and Dad had a lifetime playing the defender hand. You know – you’re the incumbent, you’re trying to work out the competitive advantages of the incumbency, how to make that work. Whereas I’m just naturally attracted to how you storm the castle rather than how you defend the castle.
As well, I would hope – because I do genuinely believe Dad’s values were really, really important – that I learnt my values from Dad and the whole idea of the democracy of the best idea. I got that from him. The way I try to obtain [that] is different from the way Dad did, but again it might well be situational.
What about your mum?
Mum far more intuitively understood what was going to build a good life, whereas I think Dad felt that, unless you were engaging at a pretty large-scale level, then it didn’t really matter. And I just don’t think human history really is on Dad’s side on that compared with Mum. A bit like the Confucians … you need to have control of yourself and to have the regard of the people close to you, and then and only then can you gravitate out to the world. I think I got that from Mum more than Dad.
Where do you get your sense of self from?
I think my kids. I know that sounds like a strange thing. I don’t think I live through them, but they’re the ones who better than anyone can call bullshit on me. The second thing is that work’s important to me but it’s not the only thing, and I think I draw from other interests to help the business and help balance and keep me grounded. So it’s not all about the work. I’m trying to live a full and rich life.
What have you learnt from fiction?
If you’re looking at Shakespeare and the epics, you’re far better off looking for protection against making the psychological mistakes there than you are reading economics textbooks or psychology textbooks, because they’re just so resonant. A friend says to me, take any of the Shakespeare’s tragic heroes and put them in another one of the Shakespeare tragedies and there’d be no story, because Othello in Lear would have it solved in a second and Lear in Othello would have it solved in a second. It’s the man with all of these foibles in the circumstance that creates the problem, and I think that that’s a really, really helpful way to think about it.
Tell me about failure and what you’ve learnt from it.
There are two types of failures. The biggest mistakes are confirmation bias and the sunk-cost fallacy – when you know you shouldn’t keep investing in something but you’re already in it and therefore you protect whatever you’ve already got. I am as aware of that as any human being, but I cannot find some way where the team will protect themselves against it. So that’s a huge problem. Completely aware, completely on to it, but still suffer from continuing to support losers when you should cut them.
The second problem, and where you can get completely hosed, is selling your winners too soon. We may have made 3½ times our money and you think you should sell it. The difference between 3½ times and that investment doubling [again] is everything.
If I look at what’s damaged my financial outcomes and my investors’ outcomes over a long period it’s been those two problems, but the second one is vastly more expensive, even though it doesn’t actually hurt you and make you want to vomit. It’s a vastly more expensive set of mistakes around making sure you really keep your good winning investments as long as you can.
Leadership is draining. How do you replenish reserves?
Dad would say the biggest problem from his life’s point of view was he did not develop outside interests. So my fishing, rafting, kayaking, diving – I have those things; they really help. A 20-year yoga practice helps. So that’s one part. I think the second part is that youth helps. I get a huge amount of replenishment from youth, and people who feel they can change the world and are really geared up to do it. And I still love the business. It’s still my most important and fulfilling hobby. Building really, really good long-term businesses, and doing it with people who are driven and energetic … I just love it. And I try really hard to focus on the investment side of it and only do the deal side on sporadic occasions. That’s the part that really drains you – it’s a fastest-gun-in-the-west business. There’s always a young investment banker who’s out to try to do it better or faster, etc. That’s really draining, so I just try to do that as little as I can because there’s no way out of how much that costs you personally.