When a private equity (PE) firm invests, they promise to their investors that their portfolio companies will generate returns which, in today’s environment, means that they need to generate topline growth.
In order to achieve their targeted return, the PE firm needs to address standstills quickly. Mid-market businesses not achieving their investment thesis can be disastrous for the portfolio. When a PE firm invests, it means that growth is not only expected, but it should be exponential compared to the company’s past performance. Here are 5 ways to prepare for potential downturns in your PE investment portfolio.
First, prepare for downturns by doing everything possible to avoid them. Downturns happen when a PE firm doesn’t stay alert and falls victim to “blind spots”. A 2018 study from Tallman Insights calls out commonly used “table stakes strategies” that are becoming rapidly less-viable in today’s global economy. Table stakes are low-bar efforts by PE firms to create a growth portfolio by simply selecting companies poised for growth and then waiting for positive results to come from the investment alone.
Heaping wood onto a smoldering fire doesn’t work anymore. In the age of global competition, it’s not enough to throw money at problems and hope they fix themselves.
Being proactive means PE firms have to add value to compete. Growth needs to be manufactured. Competitive positioning, implementing marketing plans, increasing efficiency, and sending in talented executives to make the magic happen are all initiatives that PE firms can use to differentiate themselves and dump the old strategies. Read all thirteen “Emerging Strategies” by downloading the full 19-page report.
When making proactive choices to help a portfolio company get back on the fast track, don’t overhaul everything.
Mid-market companies have already demonstrated that they are great at what they do. They wouldn’t have made it this far if they weren’t and would not have been chosen for PE investment. Consider initiatives that provide strategic leadership and coaching without stepping on too many toes. Consultants recommended or sent in by PE firms don’t need to make big changes to see big results. Even small projects can yield significant outcomes.
When dealing with executives-as-a-service providers, choose the right people for the job. PE firms need to work with trusted providers who deliver real leadership.
More than vision, PEs should check financial track records to ensure they are getting quality consultants. They should be talking metrics and have real-world pragmatic strategies for achieving financial progress. Ask about benchmarks.
Strategic plan effectiveness also depends on the individual fit of the person who gets tapped for the job. A consulting team should be well-versed in the depth and expertise of their team. A loose confederation of smart people is a recipe for slowed revenue growth. Your consulting team should not only be doing the best work of their careers, but also know themselves well enough as business executives to know who will integrate well with a certain company and who would fit better elsewhere.
A company can have the best product or service in the market and function at the epitome of efficiency and still stall out. If the knowledge of that excellent product isn’t reaching the target demographic at a fast enough pace, growth flounders. This is where marketing comes in.
The company’s senior executives know the business like the back of their hand. But are they still the experts in their industry and do they understand how growing a business is different than operating a business? Have they been hunkered down for so long that they have lost sight of the bigger-picture? Sometimes even the experts have been at it for so many years that they can’t see beyond their own horizons. They need help to find new markets, new direction, and new growth opportunities. When a PE steps up to the plate, they need to bring in the big guns to partner with the leadership team and the marketing and sales teams to jump-start a new era.
A fractional Chief Marketing Officer (CMO) is somebody who is experienced at that level of guidance and works under the executives-as-a-service moniker. A CMO comes in part-time or short-term and helps refine, define and activate the vision for growth in a structured way to achieve the goals and objectives. CMOs work with the existing staffers, providing leadership and expertise to help them achieve at a new level. They essentially take marketing teams to the edges of their own horizons and showing them growth possibilities that they never imagined possible. They are adept at building engines for growth to integrate with the company’s operating engine.
Let’s face it: Downturns in portfolio companies happen. A strong PE firm strategy means avoiding missteps and “blind spots”, paying attention to emerging strategies, and finding new horizons with executives from leading national firms. By staying alert and having a plan, PE firms can prepare for the inevitable stalls that happen without stopping the push towards growth.
CMOs can make a real difference by bringing metrics and renewed progress to a company’s marketing strategy. To learn more about how a fractional CMO can implement top-line growth initiatives for you, visit us at Chief Outsiders.