Investment Best Practices: The Role of the Wingman
“Tell me where I will die so I don’t go there.” Wingmen cover blind spots; offer perspective; provide an informed, arms-length view; and coalesce team views to help the sponsor engage effectively with all stakeholders.
Our Wingman process at NGP Capital derives from a process advocated by Berkshire Hathaway Vice Chairman Charlie Munger based on his aphorism: “Tell me where I will die so I don’t go there.”
Berkshire Hathaway Chairman and CEO Warren Buffett acknowledges that emotional and psychological biases erode prudent investing principles. Buffett has built personal defenses against deal bias: he avoids shopped deals and banker pitch decks. Berkshire Hathaway also embeds an in-house skeptic into its investment process to study investment risks separately and critique the deal. In his most recent letter to Berkshire Hathaway shareholders, Warren Buffett described one permutation of the process as follows:
“It would be an interesting exercise for a company to hire two “expert” acquisition advisors, one pro and one con, to deliver his or her views on a proposed deal to the board — with the winning advisor to receive, say, ten times a token sum paid to the loser. Don’t hold your breath awaiting this reform: The current system, whatever its shortcomings for shareholders, works magnificently for CEOs and the many advisors and other professionals who feast on deals. A venerable caution will forever be true when advice from Wall Street is contemplated: Don’t ask the barber whether you need a haircut.”
The Wingman process has evolved significantly at NGP Capital since we first adopted it in 2010. Initially called “The Inverter Process”, it addressed two issues for us.
First, we needed someone to coalesce and synthesize views from the investment team. In the early days, Sponsors were inundated with questions from the team on a potential deal. Responding to overlapping and duplicative inquiries from the team could be overwhelming and enervating. The Inverter played a vital process role, coalescing team views and focusing on the ‘Gating Items’ that the Sponsor needed to address during the diligence process.
Second, we wanted to reinforce a balanced approach in our investment process. Sponsors pronates positively after initially committing to a deal looking for confirmation in due diligence and ignoring contrary evidence. As George Orwell noted: “People can foresee the future only when it conforms with their own wishes, and the most grossly obvious facts can be ignored when they are unwelcome.” (Orwell should know, as his prior experience in the Imperial Guard in Burma and the Republican Army in the Spanish War explain much about the dystopian views he expressed in 1984 and Animal Farm). NGP Capital designed the Inverter as a counterweight, focusing on investment risks and ensuring that the diligence process adequately addressed them.
We have made two important adjustments to the Inverter process in the past ten years. We evolved the process into a broader role as — the Wingman. A wingman in an air force flies behind the lead plane, helping to cover blind spots, which is consistent with our Inverter concept. A Wingman also allies with the Sponsor, which is distinct from the adversarial role of an Inverter. We wanted our Wingman to play the role of an Inverter while acting as an advisor to, and teammate with, the Sponsor recognizing they share a common objective in making good investment decisions.
We also extended the tenure of the Wingman. In our earlier model, the Inverter’s role ended once we completed or declined the investment. Now the Wingman commits to the role throughout the life of the investment, sharing responsibility for the investment outcome. This shared responsibility (and credit) adds skin to the process. Continuity through the life of the investment ensures we have an informed, but more distanced second view on all investments, while giving the Sponsor an NGP Capital partner who considers situations deeply as they arise over the life of the investment.
Our focus on Wingmen may sound mundane, yet it is a mistake to dismiss the importance of a balanced diligence and decision-making process. In an uncertain world, outcomes are variable, which heightens the importance of a process that produces consistent, prudent decisions. Two recent examples reinforced this point.
In a two-day M&A Science seminar, 75% of the agenda focused on post-acquisition integration. Most acquisitions fail, and the predominant cause of failure is poor integration. M&A practitioners repeatedly reinforced attentiveness to integration and operational considerations as integral to the due diligence process. Clear leadership and business unit responsibility for ongoing success of the acquired business and experienced, capable operating executives to oversee the integration are often overlooked yet improve the odds of acquisition success significantly.
As Omar Bradley, World War II commander of the western front, observed, “Novices study tactics, amateurs study strategy, professionals study logistics.” The history of war, as Churchill noted, is a catalog of mistakes, and logistics often tips the scale in wars.
The Wingman process is a distinctive feature, and one of our most important processes. The Wingman role may seem the stuff of journeymen, yet as with acquisitions and wars, investment outcomes are consequential, depending on sound our performance through better judgment and portfolio management for each of our investments.
As author Peter Bevelin, who has studied Charlie Munger extensively, noted him saying, “I don’t want to be a great problem solver. I want to avoid problems — preventing them from happening and doing it right from the beginning.”
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Originally published at https://www.linkedin.com.