By now, most if not all Private equity firms have done some level of triage on their portfolios as a result of the COVID-19 pandemic. As expected, much of the focus has been on determining which companies are at most risk financially and operationally, and steps have been taken to shore up liquidity and protect supply chains among other things. However, scant attention has been spent on assessing the ability of holdings across the portfolio to restart commercial engines post crisis. This shortcoming jeopardizes the ability to take advantage of what may be transformative growth opportunities in my opinion. It also puts overall fund performance at risk in the long-term.
When I refer to a commercial engine, I mean all strategies and activities related to how a company goes to market. This includes marketing and sales activities such as lead generation, sales outreach, and customer nurturing. Importantly, these activities are based on the strategies underpinning how the company goes to market such as targeted customer segments, value propositions, sales channels, and pricing strategies. Just as each company in the portfolio has different needs and level of survivability financially and operationally, each has different needs and ability to restart from a go-to-market perspective once the lockdowns end. The problem is that just assuming that each company can pick up where they left off once they are ready to restart risks putting resources in the wrong places and hurting overall performance.
A better approach is to assess each company in the portfolio across a set of go-to-market dimensions with the goal of categorizing them by need, ability to restart, and future opportunity to determine where to focus time, energy, and treasure for maximum return.
Just as there’s a danger in not doing enough to assess the ability of portfolio companies to restart their engines, there’s a danger in trying to do too much. The goal is to quickly provide a roadmap to determine which companies should receive additional review and analysis so that energy and investment can be focused on the holdings that represent the best opportunity for return. With that in mind, here are the areas I would recommend pe investors start with:
With this review, GPs can stratify their portfolio companies into buckets such as High, Medium, and Low in terms of capability, need, and opportunity. The last of these elements, future opportunity, may be the toughest to gauge without further work. Ultimately, that’s the point of this approach – to determine where to do additional analysis and potentially to add to the investment.
Once a review of holdings across the portfolio has been conducted, restart plans can be developed for those that warrant additional attention and detail. These restart plans should be based on insights about markets and customers, as well as internal teams and technology capabilities. Gathering these insights can be cumbersome, hence the need to do some level of triage to prioritize activities and support, as well as future investments. The key questions for portfolio companies to address include:
These insights will allow company leadership teams to develop Restart Plans which can include such elements as:
This approach with allow private equity investors to allocate their time, attention, and investment dollars more appropriately to those investments likely to yield the highest return. This will lead in turn to improved post pandemic results and ultimately better overall fund performance.