Insights from the Operating Partners (Virtual) Forum - April 2020
Top Takeaways from the Accordion (Virtual) Forum
April 16, 2020
ON TO PHASE 2
During our previous Operating Partner (OP) forums on March 31 and April 7, OPs said they were implementing a phased approach to the current environment. As a reminder, Phase 1 was more about liquidity issues (capital infusion), covenant issues, $0 revenue, and a myriad of other issues. Now, they’re on to Phase 2.
This second phase is, “less about triage and more about the companies that are really having issues.” Everything is on the table – from furloughs and layoffs to capital restructuring. One of the primary issues OPs are facing is not knowing how deep the revenue trends will go and the duration of such trends.
A key theme of success in Phase 2, mentioned by a few OPs, was to keep Management, “focused on the offense.” One OP is investigating how to split up Management into two teams – one focused on the offense and the other on the defense – in order to make sure they don’t miss an opportunity if one becomes available.
Another key theme was empowering executive teams to lead. Command and control is not effective in the work-from-home environment. One OP mentioned using the Agile methodology because it works extremely well for visibility and keeping teams together. Another OP created a virtual huddle board consisting of tasks that have been on the to-do list but never executed – providing motivation and opportunities for teams to address real business issues.
ON THE STIMULUS
The response on whether portfolio companies were qualifying for any of the CARES act programs ranged from none to qualifying (i.e., minority investment). Not surprisingly, the affiliation rules are the primary reason for not qualifying (please refer to our previous event recap for a description). One OP mentioned how roughly 75% of portfolio companies are qualifying for the Main Street Lending Program. The OP subdivided portfolio companies by leverage (under 4x, under 4x un-adjusted, over 4x adjusted, and over 6x) which was followed by reviewing the rules to understand whether the federal government allowed senior leverage to be the threshold; this information is then fed to those who are lobbying. It was recommended that deals teams need to think through capital structures first, then if the time frame works, whether they want the money or the restrictions. Based on this decision, OPs need to create a training program for Management, as the Main Street Lending Program has different term sheets and these will dictate training agendas.
ON SUPPLY CHAINS
For businesses that rely on a supply chain, the primary task at hand is to keep those businesses intact, as the industry is changing on a daily basis. In fact, one OP is stepping in to help keep businesses that are a part of their portfolio companies’ supply chain afloat. Others keep in touch with their suppliers as regularly as every other day. One positive to note is that relationships with suppliers have benefited greatly in this environment; one OP noted that relationships are much deeper than before the current environment. Fortunately, there weren’t any business failures reported by forum participants…but how long until that changes?
This is an industry not nearly as impacted as the supply chain industry. However, this doesn’t mean that OPs’ portfolio companies are operating similarly to how they were before the current environment. One OP mentioned that business development representatives are repositioning messaging to make sure it is appropriate for the current environment – leveraging many short, relative video messages.
Although SaaS companies have seen a decrease in new customer acquisition, one OP stated that virtual events being hosted by a portfolio company have seen attendance rise from 200-300 before the current environment to over 4,000.
ON BEST PRACTICES
OPs are leveraging cross-company functional calls, CEOs included, in an attempt to build camaraderie in what could be an otherwise lonely environment. This also helps to deliver the right communication tone as we navigate the rapidly changing climate. It was mentioned that LPs found out about this approach and it gave them confidence about what the portfolio companies were doing to handle the current situation. Centralized portfolio company operations have been setting up webinars with functional streams to address topics ranging from working-from-home to furloughs to employee treatment.
Starting with the front lines, sales, OPs are re-balancing the sales force between internal and external – deducing that the inside sales force is far more capable than previously thought. Additionally, the sales teams will need to collect more information in an automated fashion.
Continuing with the data collection theme, portfolio companies should be leveraging technology to collect data so that OPs can access easily (e.g., iLevel). It is evident that increasing the ability to perform more advanced analytics is now a big area of focus.
As mentioned earlier, OPs are trying to get CEOs more focused on the offense, “we don’t want them focused on the day to day grind.” Competitor analyses are being executed in order to try to understand who will be weaker than the OPs’ portfolio companies on the other side of the current environment.
There has been reflection on current portfolio companies to understand which ones didn’t go as planned and why. Deal structuring reviews on a prospective basis are being implemented to ensure that more candid reviews occur in order to avoid “deals that flop,” and prevent taking on subsequent deals with similar signs and indicators.