Why private equity-led companies come better through the crisis

Private equity investors might not have the best reputation in parts of business, labour and in the media. The Corona pandemic shows that the control and professionalisation of management that accompanies private investors offers clear advantages. Both companies and investors are challenged in the crisis to react quickly in the face of increased planning uncertainty. In doing so, it is important to take into account the respective goals as well as the strategy and maturity level of the company.

For private equity, Corona poses a double challenge: On the one hand, the risks of entering companies as an investor increase because it is no longer easy to assess how much they will be affected by the current impact and medium-term consequences of the pandemic. Buying decisions under increased uncertainty require a review and improvement of processes in order to enter at the right moment. On the other hand, companies already held in the portfolio need more supervision. Whether a start-up, a company on a growth path or a crisis candidate - forecasting business developments has become much more difficult because the situation can change drastically from one day to the next due to easing restrictions or a new lockdown. Then it is necessary to react quickly when the planned figures and reality drift apart.

Since the outbreak of the Corona pandemic, many portfolio companies have made increased use of task forces, i.e. small groups of experts who specifically take care of tasks in the company that are essential for survival. Mostly it is about securing liquidity and cash flow in the event of a sharp drop in sales because this requires quick action. Due to the crisis, some investors have started to receive regular reports on the results of these internal working groups and to intervene as needed. This not only changes the organization of work, but also the reporting between portfolio companies and their private equity investors. Coordination takes place in shorter cycles and it is precisely this close exchange, which functions like a rapid reaction force, that proves to be a competitive advantage in the crisis.

In our cooperation with private equity companies, we have found that they attach great importance to sustainable performance, planning security and rapid implementation of decided measures in their investments in order to avoid unpleasant surprises. This comes as no surprise since it is a matter of safeguarding investments worth millions. The fulfilment of these demanding tasks depends to a large extent on the responsible managers. That is why private equity investors are quicker to replace managers when the situation of the portfolio company makes it necessary. What is painful for the managers concerned in individual cases often gives the companies a decisive competitive advantage because they react faster and more appropriately to a crisis.

The personality must be up to the task

From our experience, the following aspects are particularly important with regard to executives in portfolio companies, so that they come through the Corona pandemic well and also out of the starting blocks after it has ended.

  • The executive should fit the maturity level of the portfolio company
    When filling management positions, the company's experience curve should be the main consideration. A seasoned corporate manager will tend to have a hard time in a start-up company. A company in economic difficulties needs a leader who does not shy away from tough decisions. Because the Corona pandemic has both winners and losers among companies, the selection process must take into account more than ever the situation a company is currently in.
  • The personality must support the goals of the portfolio company
    The stage of development of a potential or already acquired portfolio company determines the investor's further strategy. In the case of start-ups, the aim is usually an initial public offering (IPO) as an exit; in the case of distressed M&A, the aim is to restructure ailing companies that will be sold after restructuring. These goals must be clearly communicated in the selection process of managers in order to attract the appropriate personalities. For the IPO, you need managers with a convincing presence who can carry employees and future shareholders along. For a turnaround, on the other hand, you need a go-getter who is spurred on rather than discouraged by resistance.
  • Management is particularly important in the crisis
    Regardless of whether companies are on the winning or losing side when it comes to Corona: in both cases, management becomes more important in a crisis. Start-ups and companies with strong growth pose different challenges to management than liquidity management in a crisis situation. In any case, decisions must be made analytically and on the basis of current figures. More than ever, the speed of implementation is also vital, which is especially required in portfolio companies. In addition to the right personality, professional qualifications also play an important role: for example, it is beneficial for a smooth process if managers already have experience in reporting and ERP systems in portfolio companies as well as in working with private equity investors.
  • Set up an executive search task force
    In our view, setting up an executive search task force with investors, advisors and company representatives sitting around the same table has proven its worth. Its most important task is to ensure that executives fit the investor's goals and strategy as well as the maturity of the company in terms of their personality. Whether exit scenario, performance expectation and speed of implementation - only those who clearly define these factors can find the right executive for them in the next step. Part of this process is to define the tasks of the position and the derived professional and personal criteria for candidates, because this improves the search process and significantly increases the probability of success.

The right personality

Private equity investors may change managers more often, but they also evaluate and promote people, thus laying the foundation for a good long-term corporate development. Precisely because they have an interest in increasing the value of their investment, investors initiate changes on their own initiative. To do this, they need the right personalities as managers in the portfolio company for the respective situation. The fact that private equity investors create a corporate culture in which a lot can be achieved also plays an important role in the selection process.

October 2021