Through the Virus, Setting up for the New Normal - How private equity managers and their portfolio companies weather this crisis

April 2020 — By Carolyn Mathis

Only two months ago we attended the Atlanta ACG’s Capital Connection, looking forward to a robust 2020 that was sure to follow a strong 2019.  After a busy first day, the crowd began to thin as investors and bankers rushed home ahead of an impending storm.  The storm we were all preparing for was a snowstorm.  Little did we realize that the storm clouds on the horizon that should have been our focus were coming from abroad, with the early signs of an epidemic (soon to be pandemic).  How things have changed in two short months!

With the global economy shuttered to slow the spread of the virus, we have had an opportunity to reconnect with many of the private equity firms we met with in Atlanta.  The message we hear from them is nearly unanimous.  At the moment they are focused on portfolio management with their current holdings, but they are also flush with cash, open for business, and looking forward to continued new investment activity in the near future.

For the time being, however, they have spent the last month making sure their portfolio companies are prepared to be as resilient as possible during this crisis.  Of course, that means different things for different companies.  Some companies have seen their business grind to a halt.  Others are struggling with the opposite problem – the need to manage a surge in demand during a time of social distancing.  While each situation is unique, we thought it would be worthwhile to share some common themes in best practices for crisis management.

  1. In a crisis, cash is king.  As every CEO knows, cash is the lifeblood of any company.  During times of uncertainty, nothing is more important than ensuring that the company has adequate cash.  Decisive action early in the crisis is key - drawing down credit lines, moving quickly to cut costs, accessing funds available from government stimulus packages.
  2. Hope for the best, but plan for the worst.  An extreme challenge of the current crisis is the lack of historical precedent.  Nobody knows whether we can begin to return to work in a few weeks, a few months or whether we will need to endure multiple waves of social distancing to keep the virus in check until a vaccine or treatment can be available.  Most people we talk to suggest that a best-case scenario probably looks like a return to some level of normalcy by the 4th quarter of 2020.  A worst-case scenario likely involves managing through a year or more of interruption to business as usual.  It is important that leaders develop a realistic plan to survive a worst-case scenario.
  3. Do everything possible to avoid cutting into the muscle of the organization.  A crisis brings tough choices about cutting jobs, cutting hours, cutting pay.  None of these are easy, but it is important to take a hard look at the organization to identify which lines of business, which roles and which people are most critical to the future of your business.  Do everything you can to retain those elements of the business when making tough choices. 
  4. Prepare to emerge stronger on the other side.  A crisis can also create opportunity to make changes that are difficult in the short-term but bring value in the long-term.  In every industry, there will be a legacy that this virus leaves in its wake.  The greatest impediment to new technology adoption is getting people (customers and team members) to change behavior.  A crisis necessitates behavior change.  What opportunities might this present for innovation - new products, automation, processes?  

As painful as this crisis will be, there will be positive changes that emerge.  For those companies that entered the crisis in a strong financial position, who act decisively to conserve cash, perform thoughtful contingency planning and make the tough but wise long-term decisions, there will be opportunities to make acquisitions, develop technology innovations to fill newly-identified needs, upgrade talent and acquire new customers.  

It is worth investing energy to peer through the storm to envision what the world and your industry will look like on the other side of this crisis.  Your company can emerge in a stronger competitive position to ride the wave of the next expansion that will be born out of the depths of this crisis.