External headwinds and difficult performance outlooks have forced private equity firms to rethink near-term prospects and portfolio company strategies. In this Value Walk article, Matt Katz and Andrew Solar outline a new playbook for private equity companies leading in uncertainty.

A confluence of external factors and a difficult performance outlook are forcing private equity firms to take a hard look at each of their portfolio companies’ prospects and rethink their portfolio strategies. For private equity companies, this will require focusing leadership teams on prioritizing operating margin overgrowth and pressing teams to lean into scenario planning.

Additionally, portfolio talent will need to be assessed to ensure leadership teams have the capabilities, agility, and ownership support to meet expected challenges. More than ever, PE leaders need to provide their businesses with stewardship.

A New Playbook For Private Equity Companies

For operating companies to successfully emerge from the recession in a position to lead, businesses will need to rapidly develop a new playbook of countermeasures. The new playbook must return organizational focus to operationalization from a period of growth, often through bolt-on acquisitions.

This change can most effectively be accomplished by deploying an agile, small footprint team that supports local leadership to prioritize and swarm to high value operational opportunities.

The team should be well-versed in leveraging data to identify opportunities and prioritize and quantify the impact of changes. The team should be able to peer around corners and see opportunities and risks that may not otherwise be apparent to the leadership team running the day-to-day operations.

Often from within, it can be difficult to see what is happening. For example, we worked with a chemical business that had a sales team with discretion on prices and limited incentive structure to reward high-margin business.

Consistently, applying pricing rules and incorporating market data resulted in a $20M (~10% of revenue) improvement to annual EBITDA. In instances like these, having an external viewpoint can prove particularly valuable.

Further complicating matters is the fact that the environment now and tomorrow are very different from yesterday and most leadership teams have never encountered these market conditions. Leadership teams were built to optimize growth through acquisition and integration.

The period between the end of the Financial Crisis in late 2009 and the beginning of the COVID-19 pandemic in 2020 marked the end of a 10+ year bull market. By contrast, the average tenure of a CEO is 7 years.

This represents an experience gap that is intensified by teams either having operating experience that wasn’t leveraged or that put less emphasis on hiring for operating roles. Current market circumstances may create opportunities to level up teams, enhance operating leadership, and acquire talent previously considered unavailable.