Preparing executive teams for stormy weather

GPs can help their portfolio company management proactively navigate a potential down market.

By Dr Matt Brubaker, FMG Leading

Today’s uncertain economic outlook is pressing private equity investors to consider the prospect of a recession – one that has the potential to create significant turmoil given how quickly robust growth has given way to volatility. In response, many leaders have concentrated their attention on matters like fundraising, anticipating that the environment will become increasingly competitive.

They would be wise to also focus on their current investments, helping prepare portfolio company executives for a new market reality.

Dr Matt Brubaker, FMG Leading

For more than a decade, the US economy has experienced a lengthy growth spell, creating tailwinds for companies since our recovery from the Great Recession. Amidst this economic boom, many portco executives have risen through the ranks never having led organizations through market downturns. This gap in their experience adds risk to investments and has the potential to require significant time and attention from PE firm leaders in the coming months.

Fortunately, GPs can help their portco management proactively prepare for a potential down market, helping mitigate financial risk and preventing other challenges from taking root. They can best approach this work with portfolio company leaders by focusing on the highest-level issues that sudden market changes have the strong potential to influence.

Such key insights include:

Stay focused on long-term value creation

Though leaders at the investor level understand that long-term value creation serves as private equity’s core driver, management operates at a different viewpoint with pressures that are sensitive to market blips. In essence, the latter is more susceptible to short-term forces that have the capacity to distract from the investment’s primary objectives. GPs should thus ensure their management teams thoroughly understand and embrace the company’s investment thesis and its ability to drive value creation even in a changing market. That said, GPs should not discourage management from capitalizing on shifting dynamics to the degree that they are able, as long as strategies and tactics remain aligned with the investment thesis.

Anticipate a talent market correction

A near-term recession has the potential to upend talent dynamics unlike anything the economy has ever experienced. Companies that have blunted the impact of the Great Resignation by radically changing their hiring criteria and/or exponentially increasing compensation might need to quickly change course. All the while, they’ll likely see changes internally as feelings of employee invincibility give way to gratitude for having jobs. GPs can help their portcos weather these changes by advising management teams to audit their evolving talent needs, building in a range of economic scenarios, and developing a nuanced understanding of the talent and roles that ultimately drive value. They can complement these efforts by shoring up their approach to attracting and retaining team members who will continue to be vital in an anticipated down market.

Manage your organization’s narrative

When market changes create or even raise the possibility of adverse impacts within organizations, it is all too easy for teams to internalize a host of negative messages. This can lead to a precipitous drop in morale and work teams that are too anxious and distracted to succeed. To combat this, GPs should urge executive teams to take control of their organization’s story by proactively and intentionally managing its narrative. Crafting clear, concise, recurring messaging that engages employees and aligns the enterprise around achievements, fortitude and long-term success helps inspire confidence, earns trust and allows people to focus on the critical tasks ahead.

Perhaps most crucially, PE investors should encourage their portco CEOs to separate what’s perceived from what’s real as they make decisions moving forward. Today’s uncertainty makes it all too easy for management to be overly influenced by alarming headlines and other pressures. Seeking micro- and macroeconomic data that supports big-picture planning best ensures portco strategies reflect actual headwinds impacting individual businesses.

Tension between PE investors and portfolio company management teams has the potential to complicate efforts to offer sound advice. It is thus important for GPs to build and maintain highly functional, productive working relationships with their executive teams in which parties do not see themselves as on opposing sides, but instead, are working on the same side of the table.

Dr Matt Brubaker is CEO of FMG Leading. A frequent adviser to private equity firms, he serves as an operating partner at Windrose Health Investors.