Poker and private equity – more similar than you might think

Mathew Cuthbertson

October 26th, 2022

Poker and private equity – more similar than you might think

Like in online poker, it has become gradually harder to win big in private equity. Continuous innovation and new sources of data are key to finding the edge.

You won’t find it anywhere on my LinkedIn page, but prior to pursuing a career in executive search, I very nearly became a full-time professional poker player. I started playing online at university, and competed regularly for around eight years, even travelling to Las Vegas a couple of times to play in the World Series of Poker Main Event. On my second trip to Vegas in 2014, my friend Martin ended up winning the main event for $10,000,000. Whilst I didn’t reach those heady heights, my highest ranking was a very respectable 22nd in the UK and 209th in the world for online multi-table tournaments. Playing up to 2,000 tournaments a year, I also achieved a very good ROI.

Despite this success, unsurprisingly my family didn’t approve of poker as a career choice and I eventually opted for a ‘proper job’ at Drax, while treating poker as a ‘profitable hobby’. What I didn’t realise when I first made that career shift was how many parallels there would be between poker and my current role, where I’m building high performing leadership teams in private equity. Both involve making decisions with imperfect or incomplete sets of data, and in both, players have turned to new sources of information and data to find an edge amid rising competition.


Making correct decisions with an imperfect set of data

To be successful in poker, very simplistically, you need to be able to make correct decisions based on an imperfect set of data, while maximising your expected value (EV). The ‘data’ is imperfect because you can’t see your opponent’s hand, so you’re typically using other data points to work out the range of hands they could be holding. How have they played to date? Why have they used the bet sizing they have? How have they played in the previous hands? How long have they taken to make their decision? A whole range of variables.

It’s a similar process that private equity investors go through when analysing potential deals. While they have a lot of data to work with thanks to the extensive due diligence process, there are always areas where they have an imperfect picture, particularly around the capabilities of the leadership team. There is no guarantee that a business can and will achieve the growth that a PE firm is hoping for, and investors must therefore weigh up the risk versus reward of investing in a business. As with poker, any player with access to additional insights is automatically at an advantage.


Increased competition drives innovation

The similarities don’t end there, however, as both poker and private equity have also been through phases where competition has increased significantly and rapidly, forcing players to innovate to maintain their edge. 

During the early years of online poker, a decent player could make a very healthy return fairly easily, as the skill level of the competition was relatively low. Good players could turn up and expect an ROI of 30% to 40%, without too much effort. The same could be said of private equity 15 or 20 years ago, when most firms could expect bumper returns, primarily through financial engineering, without spending too much time on seeking out the key insights or value creation levers in a business.

Of course, the boom times never last forever. Poker is a zero-sum game and as more players caught on, the quality of the competition increased, and good players’ edges were eroded. You couldn’t get away with just turning up anymore, and even the very best players were having to work harder and find other ways to maintain their ROIs and remain profitable.

It’s the same for private equity firms, which have found it increasingly difficult to maintain the same level of returns that they once enjoyed. The sheer number of PE investors has driven up competition for assets, valuations have kept rising, and firms must now find new ways of identifying the most promising businesses and then creating value beyond financial engineering - or risk seeing their returns continue to be eroded.


Poker analytics vs. people analytics – a seismic shift

For both sectors, technology and data have made the difference. In online poker, this came in the form of Heads Up Displays (HUDs), which overlay the poker software, displaying customised statistics on each opponent and how they have played in the past. These have become vital tools in the armoury of the more sophisticated players as they seek to find an edge in the more competitive market. Nowadays, you simply can’t win without them.

And just like poker players ten years ago, PE firms are now searching for the killer insights that will give them the edge over the competition. Private equity firms have a range of data at their disposal to aid investment decisions, whether that’s internal financial or operational data, or overall market insights. But one area that is yet to be fully exploited is in understanding the capability of the leadership team itself – their competencies, experience, dynamics – and ultimately whether they truly have what it takes to deliver the value required.

In a survey by Bain & Co, fund leaders named the management team as the most important factor in a deal’s success, and the second biggest cause of failure in an exit. Yet leadership has historically been the area that’s least understood pre-deal. Businesses will undergo lengthy and complex customer and financial due diligence, but with leadership teams, it’s usually limited to some informal referencing and perhaps some form of psychometric testing, with investors reluctant to demand too much during the ‘courting’ phase.

This is where Leadership Dynamics and ‘outside in’ insights can be so valuable. Just like the HUDs in poker, they give investors access to a whole range of information on the leadership team, entirely at arm’s length, so the organisation in question never needs to know. Investors can answer questions such as how the team is likely to behave in a particular situation. Is their combined experience and competencies aligned with the value creation plan? And if not, what changes will have the maximum impact?

The result is better decision-making, deeper and more focused pre-deal discussions with leadership teams, and then a faster time to value (and eventual exit) post-deal. Just like in poker, outsized returns are no longer ‘business as usual’, even for the top players. And just like in poker, winning means seeing something that your opponent can’t see – so the risk is always outweighed by the reward. 

Mathew Cuthbertson,

Managing Director, Financial and Professional Services

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