Why Reference Calls Are the Real Test of Private Equity Managers, According to Leemccabe

In a recent LinkedIn post, Leemccabe highlights a critical, yet often overlooked, aspect of private equity manager diligence: the reference call. Leemccabe argues that while traditional diligence materials like decks and track record tables are important, they are easily managed by General Partners (GPs). The true, unfiltered signal about a GP’s performance and conduct emerges not in polished presentations, but in candid conversations with those who have direct experience working with them.

Leemccabe emphasizes the vulnerability of GPs when it comes to what others say about them, especially when the GP is not present to influence the narrative. “What they are much worse at controlling is what other people say when you are not there,” Leemccabe states, pointing to former portfolio CEOs, deal sources, ex-employees, co-investors, and even bankers as key sources of candid feedback.

The Power of Unfiltered Feedback

The core of Leemccabe’s argument is that reference calls provide a level of authenticity that cannot be replicated in a formal diligence process. GPs are adept at presenting a coherent story about their culture, discipline, and value creation strategies. However, their ability to manage perceptions breaks down when third parties share their unvarnished experiences. Leemccabe notes the stark contrast between a GP’s self-perception and market reality:

“GPs think diligence is mostly about proving capability. A lot of it is actually about testing consistency. Does the external world describe you the same way you describe yourself.”

Leemccabe elaborates on the potential discrepancies, outlining scenarios where a GP might be perceived differently by those they work with. Instead of being seen as “Disciplined. Value creation oriented. Good partner to management. Straight shooters. Helpful in difficult moments. Tough but fair,” they might be described as having “over promised in diligence and disappeared after closing” or having “confused pressure with support.” This divergence in perception is where the real risk lies for Limited Partners (LPs).

Reference Calls as a Quiet Deal Killer

The impact of negative feedback from reference calls is subtle but profound, according to Leemccabe. Unlike confrontational moments during formal diligence, the damage from reference checks is often quiet. Leemccabe describes this effect:

“No drama. No confrontational moment. Just a subtle shift in confidence. A note in the file. A downgraded conviction level. A manager who suddenly feels less investable than they did an hour earlier.”

This quiet erosion of confidence, Leemccabe argues, is far more damaging than any direct confrontation during diligence. GPs often operate under the assumption that their self-image aligns with how the market perceives them. However, reference calls serve as a crucial reality check, testing the consistency of this perception against external experiences. Leemccabe points out that LPs hear these “stuff” repeatedly, and it carries significant weight, often more so than a well-rehearsed answer in an annual meeting.

Testing Consistency Over Capability

Leemccabe’s analysis reframes the purpose of diligence. It’s not solely about proving a GP’s capability, but critically about testing the consistency of their reputation and actions across different stakeholder interactions. Do portfolio CEOs genuinely want to work with them again? Do former colleagues speak with respect, or relief? Do counterparties describe professionalism or mere performance? Leemccabe concludes that reference calls are invaluable precisely because they reveal what polished materials attempt to obscure.

As Leemccabe puts it, reference calls matter “Not because they tell you everything. Because they tell you what the polished materials are trying hardest to smooth over.” This insight underscores the importance for GPs to be aware of their reputation beyond their own controlled narratives and for LPs to prioritize these candid conversations in their evaluation process.