Good enough is no longer good enough - be more Lewis

Change Management

Just as Lewis Hamilton adapts to changes in F1, Private Equity firms must evolve to stay ahead. Dive into the parallels between high-speed racing and investment strategies, and find out how a people-centric approach can enhance your returns.

The world of Private Equity continues to change and returns are increasingly harder to deliver.

Progressive PE firms are helping their portfolio companies find new ways to minimise risk and drive value from investments.

The key to that is through people-centred change management. To do that they are being, well, more Lewis.

There have been big shifts in power on the Formula 1 racing circuit in the last few years. The regular absence of Lewis Hamilton from the F1 podium isn't because he has suddenly become a bad driver. There are multiple factors affecting his performance.

What was once good enough to see Hamilton win 7 F1 world championships, a record breaking 18 consecutive years with a podium finish, and a 30% win rate was seemingly no longer good enough. Maybe he’s just getting older, but at 39 he is still younger than when Andretti, Hill, and Fangio won world championships.

Following 6 years of total dominance between 2014 to 2020, Hamilton has struggled.

What's behind him not delivering upon his high expectations?

There have been some ‘regulatory’ changes aimed at levelling the playing field, like cost capping. There have been ‘rule’ changes to encourage more excitement and less dominance. There have been ‘market’ changes when introducing 5 new circuits in the last 5 years. There have been new rising stars, including Verstappen, Norris, Russell, Leclerc, Sainz, and Perez providing ‘competition’. There has been the unforeseeable ‘headwind’ of the Covid pandemic to cause disruption. So, a mix of things that Hamilton, and his Mercedes teammates had no control over.

But, as you might expect from a serial winner Hamilton recognised the world where he plies his trade has changed a lot, albeit organically, and if he wanted to remain successful then he needed to change too.

First and foremost, he and his team had to accept that things had changed. They probably knew they wouldn’t get back to winning ways by just working harder, shouting louder, or being more ruthless. Nor should they be happy to just lower their expectations and hope for the best.

Collective response to challenges

Critically he realised that he could not change alone, and he needed the support from everyone, at all levels in all disciplines back at their Brackley HQ to collectively respond to the challenges they faced.

There are factors that they cannot control – regulation rule changes, market changes, competition, headwinds. But there are many they can control, and that’s where they focused their effort. They seem to have gotten everyone focused on the same North Star, observed what others are doing, worked together through a series of incremental changes - mechanical and aero – and reflect a new confidence as they see performance improvements from their collective efforts.

Understanding today's challenges

Apart from being F1 and Lewis Hamilton fans, we reflected on the parallels of this story to the developments in the Private Equity space over the past number of years. Those who think of themselves as the Hamilton, Verstappen, Norris, Mansell, or indeed Stewart of the PE world might recognise that what might have been good enough in the past is unlikely to be good enough in the future.

The norm in days gone by was that circa 70% of a Private Equity portfolio would underperform against expectations. Let’s say that again. 70% of investments underperform against expectations. We have always found that quite a remarkable number. In what other walk of life would we accept such high levels of underperformance? Would we be happy to invest in 10 well paid Executives happy knowing that 7 would underperform? Would we be happy if 70% of our investments in new forms of digital or technology would not do what we expected?

To add to the challenges of effecting change in portfolio companies, and in the same way as F1 the world of Private Equity continues to change, which in turns makes it even more difficult to deliver returns. For example:

There appears to be a slew of regulations or rules heading towards the sector.

Increased competition for funding from institutional investors.

The cost of debt is getting higher.

The nature of businesses being invested in is often different from what it was traditionally, with the business world shifting from a product-based model to a service-based one.

Businesses seeking investment are more savvy and will demand more from PE firms than just funding.

A people-centred approach

The two things that haven’t changed however are the pressures from funders and portfolio companies to achieve expected returns, delivered through the Value Creation Plans; and, in our view that it is people (supported by process) who deliver value from investments.

While PE firms have no control over the external changes effecting the sector, they do have control over the biggest contributor to driving value. People. And how to support those people through the uncertainty they inevitably face during an investment holding period.

We believe that deploying strong and people-centred change management disciplines throughout the delivery of the Value Creation Plan is central to driving out value closer to expectations.

Hamilton, Verstappen, Norris, and every other budding F1 world champion do not have control over the range of external factors affecting their earning potential. But they do have control over whether they accept the need to change, and how they make this change happen.

To thrive in the evolving world of Private Equity we believe PE firms and their portfolio companies need to remain laser focused on performance, and do so at pace while effecting change in partnership with a range of people across the portfolio business.

We will be publishing a short series of Points-of-View over the coming months on the ‘why’, ‘what’, and ‘how’ we work with the more open-minded clients to effect the kind of change they tell us they need.

As ‘Change Experts’ we don’t work with clients who think the only way to change is to work harder at the same things, shout louder at people to get the same things done better, faster, or cheaper, or act so ruthlessly that they actually destroy the very value they are trying to create. We like to work with the Lewis’s of the world, who believe they need to do things differently to be better. If you are more Lewis we’d love to hear your thoughts or experience.

To discover more about our change management offering, please contact Mark Bell or Lesley Fordyce.

Contact Mark Bell & Lesley Fordyce