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In high-pressure environments, where achieving top-line growth and meeting ambitious targets are especially vital for both parties, trust is the critical foundation for sustainable success. However, in the relationship between Private Equity and Portfolio leadership, research has found significant disparity in viewpoints on collaboration and capability.
Trust is defined as the willingness to be vulnerable with another, believing in their follow-through. It can be demonstrated through three different lenses: cognitive–logic, behavioral–actions, or affective–sentiment, perspective. It is not a constant, however, and thus cannot be taken for granted.
The PE-Portfolio Company Dynamic
Unlike traditional corporate environments, PE-backed companies are operating under the constant pressure of performance targets, board expectations, and a ticking clock to create value.
Trust affects everything from how quickly decisions are made to how openly risks are shared. When leaders in portfolio companies fear retribution, micromanagement, or a lack of support, they are less likely to challenge assumptions or propose bold ideas. That kind of stifling environment leads to missed opportunities and hidden risks.
Furthermore, in the PE-Portfolio Company dynamic, there is initially a perceived unequal-power dynamic, a situation in which research has found there is naturally less trust compared to peer-peer relationships. However, this result was only found in perception; trust could be leveled through intentional action.
Three major principles can help bridge this gap:
1. Transparency and alignment in communications beyond financials: True trust requires mutual vulnerability through shared information and agreed-upon goals. Yet, there is a stark difference between the proportion of Portfolio Company Executives citing communication as a tension point (42%) versus E firms (15%). Differing perceptions signals asymmetrical information flow. PE firms may believe they are being clear and open—especially about financial goals—while Portfolio Co leaders may feel left in the dark on broader strategic issues, decision-making rationales, or future plans. Transparency must extend beyond board decks and KPI reviews. It’s about surfacing assumptions, sharing context, and creating opportunities for two-way dialogue. Both sides must be willing to show their cards, admit when they don’t know, and invite constructive challenge.
Partnered alignment between the PE firm and the Portfolio Company leadership on goals of the portfolio organization can be a powerful way to establish clarity and reinforce purpose for the Portfolio Company. Within the collaborative goal setting process, divert any competitive energy to external sources, as opposed to between each other. These actions are an impactful antidote to the power dynamic influence.
2. Competence-based trust development: Trust rooted in the perception of competence has historically been found to have far-reaching outcomes, including resulting in dramatically increased strategic decision making. Leadership quality as perceived by the PE firm, however, can be starkly different than the Portfolio Company’s own assessment.
Rather than defaulting to replacement or high-stakes performance reviews, however, PE firms can gain more by investing in the leaders they’ve already bet on. Consider conducting 360 reviews or leadership diagnostics early in the hold period, as opposed to after performance dips, to proactively grow the leadership bench. By developing Portfolio leadership and enhancing effectiveness, PE firms can reduce unplanned turnover in their Portfolio Company C-Suites, demonstrate commitment to the Portfolio Company organization, and build competence-based trust.
3. Prioritizing psychological safety: Trust needs psychological safety in order to sustain, and it must be deliberately cultivated for innovation to thrive. However, leaders at PE-backed organizations worry about losing their jobs at a significantly greater rate than those at non-PE backed companies. That fear has a chilling effect. When leaders operate in survival mode, creativity is sacrificed for risk-aversion. Teams default to what’s safe rather than what’s bold. Thus, the relationship between the PE firm and the company leadership becomes transactional versus transformational.
Creating psychological safety in these environments requires a shift in mindset. PE leaders who foster a culture where mistakes are examined rather than punished, and where questions are valued as much as answers, will unlock higher performance across the board.
What might that look like in practice? Normalizing learning curves, asking open-ended questions with genuine curiosity, recognizing and rewarding experimentation, and framing growth and evolution as purpose-driven, not just financially-driven.
In conclusion
The success of Private Equity investments ultimately depends on transforming the traditional PE-Portfolio Company dynamic from a transaction-focused relationship to a true strategic partnership.
By implementing these trust-building principles, both PE firms and their portfolio companies can create an ecosystem where shared vulnerability leads to shared vision, competence fosters confidence, and psychological safety becomes the catalyst for sustainable innovation and value creation. In this evolved partnership model, financial returns become the natural outcome of genuinely aligned interests rather than the sole driver of interaction.
References
- AlixPartners. (2025). Tenth Annual Private Equity (PE) Leadership Survey.
- du Plessis, C., Nguyen, M. H. B., Foulk, T. A., & Schaerer, M. (2022). Relative power and interpersonal trust. Journal of Personality and Social Psychology.
- Levine, M. P. (Ed.). (2023). Psychology of trust.
- Mayer, R. C., Davis, J. H., & Schoorman, F. D. (1995). An integrative model of organizational trust. Academy of Management Review.
- Parayitam, S., & Papenhausen, C. (2018). Strategic decision-making: The effects of cooperative conflict management, agreement-seeking behavior and competence-based trust on decision outcomes. Management Research Review.
