The Change Management in Private Equity Explainer

Change management plays a crucial role in the private equity landscape, as firms navigate the complexities of investment decisions, portfolio management and most importantly, value creation. In a rapidly evolving market, and especially when interest rates rise, private equity professionals must employ effective change management strategies to tackle challenges and capitalise on opportunities that go beyond traditional financial engineering. What’s needed in today’s context is a comprehensive understanding of organisational dynamics, stakeholder engagement and the ability to drive transformational initiatives. 

This article will explain what change management means today for private equity professionals and the leadership of their portfolio companies.

Managing change in the private equity context

There are internal and external changes that must be managed in the private equity model, namely in portfolio companies and the firms themselves. 

In portfolio companies

An essential aspect of change management for private equity firms is in M&A, namely the integration of newly acquired companies into the portfolio and the changes that must be made in order to adhere to the agreed value creation plan. Successful integration means embedding change management principles across the entire organisation to deliver the expected return on investment. This involves engaging the top team, fostering collaboration, and effectively communicating the strategic vision, while simultaneously maintaining focus on performance and shareholder value creation.

In private equity firms

Another critical element is the continuous evolution of the firm’s own operations to adapt to emerging trends, industry disruptions, and shifting market conditions. By leveraging robust change management methodologies, private equity professionals can ensure their firms remain agile and resilient in the face of ongoing market challenges and consistently deliver superior results to investors.

What is change management?

Put simply, change management is a structured approach to transitioning individuals, teams and organisations from a current state to a desired future state. Change managers must understand the objectives, manage expectations, engage stakeholders and monitor progress to ensure the successful implementation of new strategies, processes and technologies. In the context of private equity, change management becomes crucial when a firm acquires or invests in a portfolio company with the aim of improving its performance and increasing its value over time.

Why change management is important

Effective change management is vital in the private equity environment for several reasons:

Value creation

A primary goal of private equity firms is to create value in their portfolio companies. By implementing well-planned change management strategies, firms can unlock unrealised potential and drive substantial improvements in operational efficiency, revenue growth, and profitability.

Firms often focus on liberal use of debt and strategic initiatives to drive value. However, change management principles play a vital role in ensuring the sustainability of such initiatives.

There are a few key levers of value creation open to new owners of companies, namely digitisation, M&A, internationalisation, entering new markets and leadership. We believe that optimising the senior leadership team is the most powerful of these levers, as all business decisions and effectiveness stem from this group of people. However, it is also the hardest to get right due to the unpredictability of human nature; which is why so much effort needs to be devoted to identifying and selecting the right people for the right team dynamic.

Competitive advantage

In today's competitive landscape, the ability to adapt to ever-changing market conditions and seize new opportunities is crucial. Robust change management processes can help private equity-owned companies stay agile and maintain a competitive edge.

Stakeholder satisfaction

Change management plays a critical role in managing the expectations and concerns of various stakeholders, including investors, employees, suppliers, and customers. Clear communication and alignment of goals across all parties can help ensure the success of proposed changes.

Risk mitigation

Change initiatives often come with a degree of risk. Systematic change management can help private equity firms identify and address potential roadblocks, reducing the likelihood of setbacks and costly mistakes.

Overall, a solid understanding and implementation of change management principles can significantly contribute to the success of private equity investments. Facing the challenges and complexities of change in a confident, knowledgeable, and clear manner will ultimately lead to better outcomes for both the firm and its portfolio companies.

The change management process

The change management process can be broken down into several key steps, ensuring a smooth transition and minimising disruptions during the execution of new initiatives.

Step 1: Identify the need for change and define clear objectives. Private equity firms need to pinpoint areas of improvement and establish goals that are aligned with the overarching business strategy. A comprehensive understanding of the present situation within the company allows for the development of a targeted change plan.

Step 2: Involve key stakeholders. Senior management needs to be bought into change. Employee engagement and support from top-level executives promote a cohesive and unified approach to implementing change. Open and transparent communication throughout the organisation is vital in fostering a culture of collaboration and accountability.

Step 3: Design an effective change management plan. This includes the necessary resources, assigning responsibilities, and outlining detailed timelines for each stage of the process. A successful change management plan should be both flexible and adaptable, allowing for adjustments in response to unforeseen challenges or changing market conditions.

Step 4: Regular monitoring and evaluation of the change initiatives. Private equity firms should establish key performance indicators (KPIs) and set clear benchmarks to assess the progress and effectiveness of the change management plan. Regular assessments allow for timely identification of potential issues and the opportunity to make corrections.

Throughout the entire change management process, it is crucial to maintain clear communication channels and provide ongoing support to employees. This can include dedicated training programmes and personal development plans, addressing the identified skill gaps and promoting a smooth adjustment to new workflows.

Change management models

PE firms need to implement significant operational and strategic changes to drive value creation within their portfolio companies. To help navigate these transformations, strategists have developed several change management models over the years, providing structured approaches for implementing change in organisations. Here are a few of the models often used by private equity investors.

1. Lewin's Change Management Model comprises three stages: unfreezing, changing, and refreezing. Unfreezing involves challenging established norms and preparing the organisation for change. The changing phase is when the actual change occurs, with new procedures and behaviours being introduced. Refreezing solidifies these new structures, ensuring long-term stability. This model is often favoured for its simplicity and emphasis on overcoming resistance to change.

2. Kotter's Change Management Model highlights the importance of momentum and motivation throughout the change process. Key steps include creating a sense of urgency, building a guiding coalition, developing a vision and strategy, and generating short-term wins. This model is highly relevant to private equity as it focuses on aligning stakeholders towards a shared goal and recognises the value of celebrating progress towards that goal. One of the principles of this model is “management & leadership”, i.e. change needs both the technical skills to manage, plan and oversee deliverables, and the emotional skills to communicate a vision, inspire action and empathise with staff concerns.

3. Agile Change Management prioritises flexibility and iterative progress, adapting to emerging challenges and opportunities rather than following rigid steps. While historically linked to software development, its principles have been successfully applied to various industries, including private equity, where the ability to pivot and respond to changing market conditions can be a determining factor in a portfolio company's success.

Ensuring good leadership in change management

Before any change management initiative, companies must have the right leaders in place to ensure successful value creation. Assessing leaders is a good tool in change management for several reasons:

1. Identifying leadership strengths and weaknesses: Behavioural assessment can help identify the strengths and weaknesses of leaders, which can help in identifying areas where they need to improve to effectively lead the change.

2. Identifying potential barriers: Behavioural assessment can help identify potential barriers to change, such as resistance to change or lack of communication, which can be addressed through targeted interventions.

3. Improving change outcomes: Behavioural assessment can help improve change outcomes by ensuring that leaders have the necessary skills and support to lead the change effectively.

For more on behavioural assessments, take a look at our page on PACE behavioural profile modelling. This kind of leadership assessment can provide valuable insights into leadership style, strengths and weaknesses, and potential barriers to change, which can help in developing targeted interventions to support them in leading the change effectively.