Survive & Thrive in the COVID Pandemic: Private Equity Investors – Do not Miss This Opportunity

The rapid turn of events brought on by the COVID crisis has dramatically changed priorities for Private Equity groups. All priorities have been impacted—including portfolio company management, pending sales and purchases, and overall investment strategy. New uncertainties of profitability, viability, and unexpected challenges are with us through at least 2021—in portfolio companies financials, operations, customers, safety, and more.

Now more than ever, Private Equity firms know the uneasiness of pandemic-related uncertainties—and see that their portfolio companies must stay alive.

To survive and thrive during these challenging times, private equity’s portfolio company executives require the strong simultaneous ability to:

• Lead during crisis
• Preserve current customers, add more, and further build the life-blood revenue-producing relationships (often exclusively through virtual/online meetings)
• Retain employees and organize departments for better efficiency and effectiveness in the face of reduced size, more health regulations, and unexpected absenteeism due to COVID-related employee and/or family leave
• Identify and prioritize key initiatives within resources available (the core definition of “strategic planning”) across all functions, such as:
  • Optimizing known savings that should occur in each department
  • Implementing new savings not identified due to limited experience
  • Cutting downtime, overtime, RAW/WIP/Finished Goods waste, obsolete inventory, out-of-stocks, and other inefficiencies
  • Cultivating more business with existing customers and profitable, incremental business with new customers (and often new channels)
  • Aggressively filling the revenue-profit pipeline with newly created products and new business development programs
• Ensure progress on these key initiatives and motivate their teams to achieve less with more—without losing focus or momentum
• Analyze, track, and forecast (with CFO collaboration) the top line, the bottom line, and cash flow projections with accuracy, timeliness, and clarity
• Overall, always ensure revenue and profit visibility—eliminating uncertainties wherever possible, removing fear of viability, and proactively leading through those situations that truly cannot be foreseen

In the Army, they teach battlefield lifesaving steps: stop the bleeding, clear the airway, protect the wound, and treat for shock. Army recruits need a simple process to learn because there is no time to learn it when a life is at stake. The same holds for Private Equity today. It is expensive to learn when a company is at stake. Crises require strong leadership, and even PE partners with crisis leadership experience can be overwhelmed by the number of portfolio companies that have been impacted.

We asked FortéOne’s Private Equity Advisors and our Portfolio Companies Interim Executives, who have helped hundreds of companies through crises, to share their guidance. The first step is to “identify and treat the wounded”— determining which companies need immediate attention and assessing the ability of their leaders to keep the company viable during the pandemic with a well-crafted survival plan. For those “code red” companies, the following questions should be asked:

• Where do I start – Trust and Mobilization: Does our Private Equity firm confidently trust that the portfolio company’s leadership team is capable of rapidly shifting into crisis management mode—able to both craft the survival plan and run the company—and assume a “war room” mentality for the duration of the crisis. If we need to “hunker down,” what does that look like?
  • What do I need to do immediately (tomorrow) to conserve cash and keep the operation viable? This may include immediate SKU reduction, furloughs, etc.
  • Do I have the financial information required to make informed decisions, and if not, how can I develop it quickly?
  • Does my leadership team really understand the financials, especially the differences between fixed and variable costs, and can they quickly analyze and appropriately scale the business down?
  • Can my current leaders manage in this crisis? Do they need assistance to plan and execute?
  • Will current portfolio company leadership accurately and on a timely basis report to the Private Equity owners all known as well as unforeseen issues, progress, opportunities, trends, and projected financials?
  • Overall, can we trust there is solid leadership during this exceptional time? Or is there “uncertainty risk” of non-transparency, negative surprises, and the potential of unexpected entity failure?

• How do I get Back in Business – Restart: What products and customers are my fastest path to restoring cashflow?
  • What are my key customers’ ‘restart’ plans and timing? What can I do to help them accelerate?
  • What products and services are most profitable? … unprofitable?
  • What suppliers are in position to provide sufficient inputs to support our manufacturing plan?
  • How do I ensure employee safety in plants and warehouses? Are employees willing to return to work? Under what conditions?
  • How do I more optimally plan production and minimum/maximum labor and inventory levels during the rapidly changing conditions?

• How do I Adapt – Recover: What is my interim operating model—is it just lift and shift—and/or is this likely to work? For at least 6-12 more months, much change and uncertainty will prevail internally at the portfolio company as well as externally with supply and sales. Until we return to some sense of normalcy. companies need an Interim Go-to-Market model, which will continue to change as the environment changes.

Think about the strategy for the back end—when you emerge—which will likely entail a new way of doing business. There is a high likelihood the future will be more digital and less face to face. In some industries, it may also be wise to implement immediate “survival changes” and then wait until the ground stops shifting under your feet to craft the plan to adapt.

Changes FortéOne recommends to clients include:

• Finance
  • Cost Reduction: Middle Market manufacturing companies should explore cost reduction to improve profitability. Greater emphasis on supply chain optimization to reduce costs and reduce risk. For example, understanding your supply chain network at a deeper level including your supplier, your suppliers’ suppliers, etc.
  • Financial Support: If not present already, develop financial information systems to support the flexibility and decisions making required
  • Digital Transformation: Including ERP implementation will reduce supply chain costs and will speed up with more and more employees working remote in the business.
• Operations
  • Reconfigure Factories, Consider Robotics (when affordable): Manufacturing changes will be required to conform with social distancing requirements. Robotics are becoming less expensive and can be easily developed for repetitive tasks.
  • Shorter and Redundant Supply Chains: Reshoring or near-shoring for companies with extended supply chains (suppliers in China)
  • Risk Reduction: Develop secondary and tertiary sources and feed them business. Understand the “low cost” vs. “risk” tradeoff and get leadership onboard with risk reduction. Business Continuity Planning will become more prevalent due to supply chain failures during the pandemic.
• Sales & Marketing
  • Remote Sales Support: Many companies may need an outbound call center and a strong digital platform. Absent these, they will be at a disadvantage to those who have them.
  • Adaptable Sales Force: Re-evaluate your sales force, who may need to be changed out to fit the new Go-to-Market model where customers do not want to meet in person
• How do I Make this Scalable and Secure: How will we protect our employees and what is my new company model if some or all of my staff work from home, including my sales staff, especially if this is the model for the foreseeable future?
  • How do I get out there with this new model—including all the ancillary considerations needed to “harden” the model against IT security and other risks?
  • Do I have a team in place to do Crisis Management for the next 24 months? Can they adapt the company to the next normal?
  • Do I have the right tools in place to support a work-from-home (WFM) model? Do I have the right salesforce automation tools in place to support a virtual sales model? How does my salesforce engage with clients when no-one wants to see a salesperson? And how do I manage when salespeople do not want to get on a plane?
    • This may be a good time to be doing Voice of Customer research, because people are willing now to engage in these calls. Test and understand the strength of your relationships, and the readiness of customers to purchase your products.
    • Should you be targeting new markets? This crisis has caused disruption but also opportunity throughout the supply chain.
    • With your customers not accepting in-person meetings, are your marketing investments and efforts appropriately geared to online, social media, and other more effective approaches?
    • Are we able to innovate? Product Innovation is an essential part of Crisis Management. For example, restaurant foods can be packaged as Take Out/Pick Up offerings as well as Prepackaged Grocery Products.

• Finally, How Do I “Not Waste This Crisis” ‒ Retool: Knowing that some competitors will not adapt to the new normal, what steps can I take to strengthen my company?
  • Companies often fall into a cycle of complacency, thinking that “they will recover.” Instead, they are often left behind by their more nimble competitors.
    • McKinsey learned that firms that tried to make the old normal the new normal shrunk by 10% vs. those that adapted business to the new normal who grew by 15%—for an absolute difference of 25%. Which is huge, especially for business investors.
  • Build a Future Team: You need people able to think outside the box. These are probably not the project people you have inside the company managing the day-to-day recovery efforts. In most businesses, this requires perspective from outside the company. COVID-19 is forcing the pace and scale of workplace innovation; you need to stay ahead of your competitors while remaining relevant to your customers’ needs.
  • Identify Industry Opportunities: Are some of your competitors substantially weakened – and is this a time to either buy them or take them out of the market?
  • Assess Your Talent Needs: Progressive companies will be hiring new people during the pandemic because they bring new skills necessary to thrive in an increasingly virtual world.

FortéOne has helped Private Equity portfolio company leaders work through crises for the past 20 years. We believe strongly that “it is a full-time job to run a company and a full-time job to change a company.” This is doubly true in times of crisis. When one person is tasked with both jobs, the result is frequently failure—with future company viability uncertain at best and total liquidation / bankruptcy at worst. As a Private Equity owner, we welcome the opportunity to discuss with you confidentially how FortéOne can help your portfolio companies Survive and Thrive during this pandemic.