The COVID-19 pandemic has had a severe impact on the global economy leading to significant short-term and longer-term issues for private equity portfolio companies.
Investors have seen the rate of new deals reduce substantially and as a result are predominantly focused on working closely with portfolio company leadership teams to manage the impact of the crisis and adapt to the new status quo.
The current turmoil in the markets and resultant impact on portfolio company performance will expose some management teams as they look to respond to these new challenges. With investors working closer than ever with these company executives, there will inevitably be some investor / executive relationships which experience heightened tension, while other relationships will demonstrate more cohesion during this period.
The reactions of management teams when presented with the extreme situation brought about by COVID-19 will be gauged both explicitly and implicitly by the private equity shareholder.
As a private equity focused executive search and interim solutions provider, we are continuously speaking to investors, portfolio operations team and portfolio Board executives. This document poses key questions around portfolio management team resilience from across the sector, which we have consolidated for your reference.
“don’t throw the baby out with the bathwater”
Is the management team calm, focused and organised in response to the ongoing COVID-19 related business challenges?
This period of acute uncertainty may lead to nervousness and procrastination from certain leaders who operate best with relative clarity and assurance around their daily responsibilities. The pandemic has thrown management teams into unchartered territory where an agile and flexible response is required. Many experienced private equity portfolio company leaders will be adept at change management and respond accordingly, others who have not experienced companies in real flux, may baulk at the task. This can be witnessed by a lack of clear planning and prolonged indecision from key executives when the demand is for swift, decisive and responsive action. As a reaction, rather than “throw the baby out with the bathwater”, investors are advised to take a measured approach when handling the portfolio management teams at this juncture, as the initial confusion may settle when portfolio executives begin to acclimatise. Equally, the crisis will clearly highlight those leaders who are most capable and those who struggle with exceptional circumstances.
'detailed analysis and forecasting is at the top of the agenda'
What specific actions have the portfolio management teams taken to address the crisis and how effective have those actions been?
As most management teams have been forced to focus away from driving future sales growth and onto more immediate actions to address current business performance, a shift in mindset and approach amongst portfolio management teams is required. Investors will keenly observe what measures have been taken and their efficacy. Whereas focused cash control and daily cash monitoring may not have been a priority before, portfolio companies are increasingly ensuring that detailed analysis and forecasting is at the top of the agenda. Scenario modelling and financial planning needs to be applied to help steer businesses through the next business quarters , though any modelling must also remain realistic and not become a distraction for executives who need time to run the business. Headcount, resource planning and capital allocation are paramount concerns in this environment and portfolio board executives need to ensure robust processes are in place whilst rigidly monitoring all spend. All measures need to be implemented quickly and be subject to continuous review for the foreseeable future, with reporting that is succinct and impactful. Management teams that quickly adapt and deliver these measures are well placed to then navigate the testing future market conditions.
'open and healthy debate must be promoted'
Are the key portfolio company executives aligned with each other as well as with the investors’ perspective on action plans in this environment?
Unique circumstances such as the COVID-19 pandemic elicit differing psychological and emotional responses from the wider population. Equally, portfolio executives will react individually when confronted with this extreme situation and personal concerns could factor into and cloud business decisions. Key executives may develop opposing views on optimum solutions at this time, depending on both their emotional reactions and differing business judgements. This can lead to conflict and even confrontation as previously healthy debate becomes more strained. Investors within a firm will also each have their own opinions on how best to manage an asset in such an environment. Given the potential for differences in opinion across all vested parties, consideration of such issues should be openly discussed and considered both across the investors and portfolio executives so an agreed, unified approach is implemented. Healthy debate should also be actively promoted as everyone is on a similar learning curve, so it is critical that all parties remain open to new ideas and other perspectives.
'Board executives may lack the requisite expertise to drive performance'
Does the portfolio management team possess the right skills, motivation and experience to lead the business through what could be a lengthy period of underperformance?
With so many industry sectors severely impacted and with annual budgets and revenue targets being redrawn for most organisations, many investment plans will also need to be fully reassessed. A sizeable proportion of portfolio companies will undergo considerable business transformation and in certain cases, wholesale restructuring of their operations. Board executives may lack the requisite expertise to drive performance within this new reality and crucially, some may also lack the appetite. In particular, growth-oriented management teams who now face business re-engineering challenges are more likely to be exposed as the focus moves towards cost base rationalisation and driving operational efficiencies and away from M&A and other strategic initiatives. It is prudent for all parties to determine if the skill sets required for the current and mid-term business objectives are present within the incumbent executive team. In order to do this, a full appraisal of what skills are required and for what period is advisable.
'empathetic messaging during this period is key'
What is the long-term damage and cultural impact on the portfolio businesses and how is this being assessed?
Albeit more difficult to fully appreciate and analyse, investors and their portfolio Board executives should keep a close eye on the impact that dramatic changes in both the business reality and society has had on their people and culture. How management teams have reacted during this crisis and how that has been perceived by the workforce can either positively reinforce or negatively impact a company culture. The importance of empathetic messaging during this period is key as organisations make redundancies, furlough staff and cut costs. Corporate culture should be a key topic of discussion at Board meetings, citing specific issues and debating solutions, despite the obvious need to focus on numbers. If the market returns to normality but staff have become disillusioned by the actions of management during the crisis, there could well be unexpected attrition in the future. Measures to improve morale, regular communication with key middle managers and the wider workforce and ‘personal contact’ are all important. Productivity should also be monitored during this new virtual way of working, so technology is embraced in the right way once business returns to normal. A positive culture will ensure the best bounce back from this period of instability.
'developing discrete talent pipelines'
How is the PE firm preparing for the potential volatility and movement within its portfolio management teams?
Adhoc monitoring of management team responses to COVID-19 may not prove sufficient and without having contingency plans in place, investors risk the double blow of restrictive market conditions coupled with the sudden departure of a Board member, whether forced or voluntary. Regular investor meetings with a mandate to observe and discuss the relative input and efficacy of portfolio Board executives as well as their commitment levels to the company, can ensure the firm is best prepared for inevitable upheaval across its portfolio. Planning in advance for Board changes in addition to the analysis of financial performance is being evidenced by PE firms within the market, with some firms developing discrete talent pipelines should they need key executives swiftly. The changing market conditions require investors to be highly conscious of Board executive sensitivities, and there needs to be a robust strategy to adopt swiftly if changes are required. More than ever, building stronger relationships and rapport with all key executives in a portfolio company will help steer the course of an investment and avoid unnecessary fall out.
As the COVID-19 situation continues to create uncertainty, the impact on portfolio performance both actual and expected is profound. The goal for portfolio management teams is to adapt quickly to survive in the new business environment they find themselves within.
Assessment of portfolio Board executives against both the current and predicted situation for the remainder of the investment is critical to determine which leaders will succeed, who present a flight risk and which executives may not transition successfully.
At Bronzegate, we believe matching leaders to the situational requirements of a business is crucial to optimising performance. Our bespoke CFO Assessment Plan incorporates situational fit amongst other key assessment criteria during the executive search process to ensure the right CFO is always appointed. For your complimentary copy of the CFO Assessment Plan, please contact one of the Bronzegate Partners.