Finatal Insights: Building Portfolio Resilience May 4th, 2020

Finatal recently asked a number of PE firms to share how they are building portfolio resilience in light of the current circumstances. While every business and PE house has been impacted to some degree, we have seen a range of responses from investors in terms of building resilience and managing through the current economic situation. From our ongoing conversations with investors, we thought it would be useful to share some of the approaches and examples with you.

James Markham, partner at Graphite has arranged online training for sales forces to work remotely and find new ways to engage with their customers. A business transformation director has been sourced to review the processes and practises of one portfolio company so that it can re-emerge stronger and more efficient post Covid-19.

“We are all working with the management teams of portfolio companies to reassess their markets and adjust their go-to-market strategies accordingly as well as helping to plan how their operations may have to be restructured,” he says.

Louise Kingston, Investment Director at Livingbridge, says they have utilised their internal resources and external network to distill information related to the pandemic across their portfolio. Specialist task forces have been established to share regular announcements and tackle issues such as furloughing. “This saves every company doing their own research,” she says. August have taken a similar approach to cross-sharing information across their portfolio, establishing Covid sub-committees, sharing daily bulletins, and hosting webinars. Kishan Chotai, Director at August Equity, says maintaining a consistent message is key. “The worst thing you can have is that people don’t know what to do because the messaging doesn’t line up,” he says.

This cross-sharing has extended more broadly across businesses. August have been able to redistribute face masks from their portfolio business Dental Partners to others. “Everyone is working together. That’s been a really important thing,” says Chotai.

He says that August have historically worked closely with their portfolio businesses on practical issues like cash flow management, modelling and digital transformation, and are continuing to do so in light of the current circumstances. Livingbridge are taking a similar approach, Kingston says, yet she recognises the challenge of providing scenario planning. “There are huge variables that no one can control or predict. Our boards have switched focus overnight from long term strategy plans, to short term weekly cash flow forecasts,” she says.

Graphite’s focus has been to work with management teams on shifting the focus to cash rather than revenue, while cross-sharing information between CFOs and HR directors in particular has helped their businesses share what’s worked in different scenarios, as well as information around legal issues.

Responding to the human impact of the pandemic on their businesses is as crucial as the practical support. Connecting peers across the portfolio and hosting webinars on topics such as employee engagement is “as much about providing emotional support to each other during this stressful time, as well as facing big issues like redundancies and furloughs together,” says Kingston.

Maintaining engagement both with portfolio employees, as well as customers, is key for when a new normal resumes. Chotai tells of the CEO of their nursery businesses having personally spoken to every single member of staff and parent in the wake of the pandemic. “Whilst people are furloughed, you can easily lose the culture, relationships and interaction that’s been built over years,” says Chotai.

In terms of hiring, Kingston says they are progressing with processes that already were in place prior to the lockdown, however completing the process entirely remotely has its challenges.

“Unless people are key hires or the recruitment process was towards the end, we’re not outwardly looking for new c-suite candidates, where we’ve had people and a process in place, we’re not saying no to them, they’re still coming on board.” Chotai warns that conversations around hiring need to continue, and that if businesses go on a full hiring hiatus, it could take even longer than six months to pick up to where they were. “If you stop all hiring activity without any forward view it’s going to be another three to six months before you do anything.”

“This broadly reflects the conversations we’ve been having with private-equity investors across the mid-market , says Paul Blant, Managing Director at Finatal. “It’s great to see how portfolio businesses and investors are working together to both stave off short-term issues and think about longer-term planning.”

Finatal have seen a rise in temp to perm hires, while the inability to screen permanent candidates face to face holds some clients back from completing on permanent hires. “Clearly we have seen an impact on hiring, but after an initial hiatus, people are adjusting to new ways of doing things and focusing on critical hires,” says Blant. “Obviously there has been a big push in Zoom interviews but we have also seen a situation where a client met a candidate in their back garden, while observing social distancing, to cement their working relationship.”

While these strategies have helped mitigate the impact of the pandemic on some portfolio businesses, for others, the impact will have longer lasting effects. Markham says that across the 18 companies in their portfolio, there is clearly a range in terms of effects. “Initially, some believed the impact would be relatively short term with a V-shaped rebound. It is becoming clearer that restrictions on economic activity will last for some time, forcing some sectors to materially adjust how they operate and engage with their customers,” he says.

While it’s not a surprise that consumer businesses are struggling, Livingbridge’s essential B2B businesses are growing, and some, like their cyber-security business, Adarma, are thriving. While Kingston admits that there will be lost revenue in the short term, a large proportion of the portfolio are already starting to think about future game-changer growth opportunities, such as bolt-on acquisitions. “Where appropriate, we have moved agendas from short term planning to thinking how to mobilise funding and support for M&A and engaging with targets,” she says. While there’s a possibility that some lockdown restrictions will lift in early May, some private-equity firms are cautiously optimistic. “We are now through the early shock phase of March,” she says.

“Clearly, every business and portfolio needs to be treated as individual cases,” says Blant, “but it is great to see some practical examples of how PE firms can utilise their networks and resources to help businesses navigate their way through such unchartered waters.”

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