At the table
> Advent International
> Baird Capital Partners Europe
> ECI Partners
> Equistone Partners Europe
> Gresham Private Equity
> Inflexion Private Equity
> Lyceum Capital Partners
> Montagu Private Equity
> Phoenix Equity Partners
> Sovereign Capital
> Synova Capital Partners
We’ve been here before. Several times before, in fact. But it looks like Greece is now finally set to bomb out of the euro. And yet, if the past few years are anything to go by, there’s still time for a last-minute reprieve. After all, if there is one certainty in post-Lehman Europe, it is that nothing is certain.
It is this unprecedented level of volatility that is making the private equity portfolio management professional’s job so challenging. Every business that a buyout house owns must be primed and prepped for just about any eventuality. This is scenario planning gone haywire.
“In September 2008 we sat down with every portfolio company and applied all the scenarios to see where the stress is,” said one portfolio management specialist at a dinner recently hosted by Real Deals and global insurer Marsh. “That was met with some furrowed brows, but in hindsight, in one way or another, most of those scenarios got used. If we had not gone through that detailed process they would have just happened to people rather than be managed by them. It is risk management 101, the very first thing we do.”
“It was vital for us to inject some urgency around ‘what if’ planning,” commented another. “Entrepreneurs have a naturally optimistic gene. You have to coax them into looking at risk. But as the dislocation has played its course, many are really glad to have had those discussions.”
But another expert claimed to have taken a rather different tack in the aftermath of the crisis – what he termed the “JFDI approach” (Just f***ing do it). “We went back and renegotiated all bank terms to push out repayments first of all. Second, we sorted out the balance sheet and, linked to that, took out cost. We battened down the hatches and made sure management teams didn’t get carried away with the exciting stuff – new business initiatives – focusing instead on getting the basics absolutely right.”
Indeed, there is no doubt that cost management has become a vital component of portfolio management. And understandably, it doesn’t always go down well with management teams. “The trick is to do it once and then do it again. There can be resistance. But if the situation deteriorates they tend to get onboard pretty quickly,” said one guest. “Increasingly the ability to manage costs first and aspirations second has become second nature.”
The trick in relaying cost pressures to management, it would seem, is in making it as unemotional as possible. By encouraging them to prepare for the worst and help formulate a set of triggers, it becomes their decision as much as the private equity house’s.
But while removing the emotion is important, it is vital not to take away a team’s belief in the future. “If you get to the point where the management team is staring down the barrel of a gun, the story is written – it is only a matter of time,” said one. “In some businesses the death rattle has already happened and you have just got to get it done. But if you believe there is value, don’t take away that belief. Otherwise you will have two years of management hell and nothing to show for it.”
But cost-cutting alone is not enough. Growth is ultimately key. The majority of guests claimed that the emphasis on financial restructuring and survival had passed – despite the threat of an impending refinancing wall – and that by now, investments have either been lost or are destined to make it.
A balancing act must be performed between preparing for the worst and aiming for the
best. “If we stand still, we go backwards,” said one guest. “Of course there is a lot of focus on risk but there is also a lot on identifying the growth opportunity.”
“The focus now is on how you grow a company in a difficult environment where the economy is flat at best, interest is stacking up and incentives have come unstuck,” said another. “It is not easy, certainly, but it is vital.”
In particular, with the Euro=pean situation no closer to resolution, internationalisation is essential to any growth agenda, with the focus of global strategy shifting from cost management to market penetration. “Markets like the Far East and South America are no longer simply economies used as a cheap source of goods and labour. They are a revenue source and that’s an entirely different proposition,” said one guest.
“It’s about market entry,” said another. “But it’s also a bit about marketing. For a mid-market firm, having a meaningful internationalisation strategy is one way to differentiate yourself in an undifferentiated market.”
Whether a portfolio company is in full fire-fighting mode or aggressively expanding, the relationship between investor and management is key. Firms may differ in their “house style”, but all believe that the relationship is ultimately a collaboration.
“If you ever find yourself in the situation where you are dragging management along you are backing the wrong team,” said one guest. “Alternatively, you are in the wrong industry. You should be doing it yourself. We could all make a lot more money by being entrepreneurs. It would be wildly arrogant to believe we are better at their business than they are.”
Nonetheless, regular interaction is crucial, and never more so than right now. According to one specialist, management teams hit business plans less than 50 per cent of the time, even in a booming market. “In the bad times you are lucky if it’s 25 per cent,” he said, “so you cannot afford to leave anything to chance.”