Private equity: Preparing portfolio companies for ‘back to business’

Private equity firms have worked closely with their portfolio companies to navigate the sudden COVID-19 crisis—providing support to ensure the health and safety of team members, assess cash and working capital, prioritize spend to reset cost structures, and negotiate with suppliers and partners to get creative with payment terms. Most recently, the focus has turned to navigating the latest stimulus bill to capitalize on emergency relief funds for businesses with 500 or fewer employees.

But the question we will all come back to: What do you prioritize now and how do you sprint out of the tunnel when we emerge from this crisis?

How you spend this time not just reacting, but preparing, will prove critical for investments. From being ready to meet pent-up demand to operating in a world with tighter restrictions on interstate and international travel, the market landscape has changed. Now is the time for private equity investors and portfolio companies to instill flexibility and agility into operations.   

As advisors to many middle-market PE firms, here are six things to consider:

1. Increase supply chain resiliency to protect operations

The global nature of this pandemic has stressed supply chains and demonstrated why resilience and diversification must be a prominent part of your strategy. Greater resilience will come at the expense of maximum efficiency and affect profitability, but will be key to weathering a crisis. 

Start thinking about how your partnership ecosystem will change. While some companies began making strategic supply chain adjustments last year in response to tariff policy, it is prudent to continue re-evaluating and diversifying the supply base, particularly for critical components. Some suppliers may go out of business or have substantial backlogs and production delays. Dual sourcing allows companies to hedge against supply shortages. And whether done domestically or internationally, establishing suppliers in a mix of geographical locations is a must to mitigate risk.

2. Hone forecasting and reporting capabilities to speed up decision-making

Given the current volatility, effective modeling and forecasting capabilities are important—particularly around demand and cash. Improvement opportunities include updating and reviewing pipeline data more frequently, updating KPIs, and including supply chain and operations executives in planning discussions. Portfolio companies should also consider new analytics capabilities—while many view analytics projects as longer-term efforts, we have found it possible to accomplish in weeks. How? By focusing on a high-priority hypothesis or area of need and then using agile techniques. This approach can also help PE firms gather and report key performance metrics across all portfolio companies so that partners have better insight into which companies may need immediate assistance and in what areas. 

3. Plan for ongoing health and safety concerns

Research shows the coronavirus won’t have a hard stop, so employers will need to make appropriate changes to their workplaces to minimize the risk of new outbreaks. This may include phasing returns over a period of time or new scheduling approaches, such as converting from one shift to two skeleton shifts that never overlap. Companies may also need to adopt new cleaning or sterilization procedures and alter back-office and manufacturing/warehouse floor plans to maintain greater social distancing. Similarly, they may need new protocols for interactions among co-workers or with customers. Bottom line: Incorporate these scenarios into your operations and financial planning. 

4. Manage strong fluctuations in demand by optimizing labor and productivity

As business resumes, aligning staff to volatile demand will require sophisticated labor modeling and planning exercises. Businesses with a large number of scheduled workers may need to adjust their operating hours frequently to respond to spikes and dips in demand. They should also make sure they are using technology to its full potential to maximize human efficiency and productivity—for example, to make sure doctors that cover multiple hospitals aren’t excessively traveling between them. When employees return to work, assume many will still need flexibility due to factors such as extended school or daycare closings. This will add to scheduling complexity. 

Secondly, think about redeploying talent to activities that provide greater value. For example, an e-learning software company that just signed on a slew of new customers may need to quickly leverage employees from other departments to onboard customers. For companies experiencing less demand, take advantage of this time for expanded training. Finally, assume that some, perhaps as many as 25%, of furloughed workers may choose not to return and some positions may need to be filled through hiring. Be prepared to use remote channels for recruiting and interviewing—and potentially onboarding and initial training, as well. Consider tapping contractors to fill critical skill gaps to meeting surging customer demand.

5. Slow down certain strategic projects—but speed up others

As you look for opportunities to reduce or defer costs and reprioritize projects, even projects deemed essential to transformation and future value creation will come under scrutiny. Consider, however, that this environment is actually conducive to fast-tracking certain initiatives—especially those that are high value, already paid for, or near completion. For example, a company could tap underutilized resources to complete a system implementation project faster and with potentially less operational risk, especially if near completion. Similarly, accelerating cloud migration initiatives can reduce or eliminate reliance on company-staffed data centers. A lot of technology work can be done virtually, enabling companies to maintain momentum while people are away from the office.  

In particular, look at the rapid steps taken to weather the COVID-19 crisis and extend them. For example, a manufacturing company may have previously relied solely on an outside sales team, but set up a portal for B2B online customer ordering; it should extend these new digital capabilities to complement its sales force instead of shelving it in a few weeks.

6. Reflect on your crisis response capabilities

Capture the lessons learned while this crisis is still fresh in your mind. One in five C-level execs recently told us this market crisis will mostly change their crisis response practices (ahead of supply chain risk and debt position). Many companies tend to focus business continuity planning on IT, but this experience has demonstrated loud and clear why it must be broader and include other areas like supply chain and workforce. When it is appropriate, conduct post-mortem discussions: What did you learn from this experience? What worked and didn’t? Where do you need to be better prepared next time – for example, how can you negotiate new customer or supplier contracts better to protect our interests in the future? 

Every business has unique needs and considerations. We have offered the ideas above as a starting point, as they are broadly applicable. There are deeper elements to each. As a trusted advisor to many private equity firms and their portfolio companies, we can help facilitate scenario planning and preparations for the new normal.