Insights from the Operating Partners (Virtual) Forum - June 2020
Top Takeaways from the Accordion (Virtual) Forum
On June 18th, Accordion held its sixth virtual gathering for Operating Partners (OPs) to exchange intel and advice regarding the current state of the PE industry. These were some of the key themes and discussion points:
ON THE RECOVERY PHASE
The question looming at the top of most OPs’ minds is, “what does the new normal look like?” To initiate the conversation, one of the OPs shared an overview of a framework his firm developed to assist their portfolio companies through the recovery phase. He created the anchor framework to discuss the recovery planning process with Management teams and ensure they would perform a fulsome review (instead of reverting to old or default business models). In doing this, the portfolio companies were asked to look at the current environment utilizing two lenses – an external and an internal.
The external lens should focus on understanding how the market dynamics have changed in the customer, competitor, and supplier landscapes. The internal lens should review the operating model to understand what processes have been fractured, if there are any vulnerable organization structures, and if the culture has been strained. Once the internal and external reviews have been performed, the portfolio companies will need to consider: A) which market changes they should adapt to, and B) how to keep profitability in the forefront of the picture. The OP who introduced this idea was conscious to not position the timeline as long in the tooth, e.g. 3 years. Rather, his firm positioned short-term as 90 days and long-term as 12 months (but these time periods can be flexible).
When other OPs were asked about whether any frameworks were implemented in their firms, one OP responded that his firm implemented one and was impressed with his firm’s portfolio companies’ substantive ideas. After these ideas were created, the OP challenged the portfolio companies’ leadership to think through how these ideas bump up against the cost constraints in place, given the headwinds produced by the current environment. He said his firm has also been keeping a close eye on the macro-environment and Q2 earnings.
Another OP mentioned that the framework is helpful but the challenge for his portfolio companies has been the constant state of change produced by this environment; “pen to paper this week may be different by next week.” It was agreed that sponsors shouldn’t be tone deaf to what one’s competitors are doing (i.e. price drops) and be prepared to make adjustments to one’s plan. Though COVID’s effects have been quite dynamic so far, OPs should take a close look at the data and see if it’s worth making that business strategy shift.
The facilitator then asked, “to what degree have OPs engaged third parties to understand whether a wholesale review of the business is needed?” He said his firm is wrestling with leaving to Management teams with existing resources or bringing in a third party. One OP reported that he has not been too interventionist and reminds his portfolio companies of the resources available to them. Most responses were geared at arming the CEO, but one OP responded that his firm has been focusing on one level below the CEO – the CFO and CHRO. The CFOs and CHROs were brought together about every other week to get them talking and moving actions in the correct direction.
A question posed was whether participants have seen a spike in cyber breaches since the current environment began. One OP responded that a portfolio company experienced a $250k loss because of a breach. Another OP, whose specialty is technology, mentioned how she set up a cyber program prior to the current environment – specifically to address phishing, email monitoring, and other defense/informative programs for employees. She noted that cyber health checks are performed on an annual basis and that a CIO conference is held on an annual basis as well. It’s clear that in this climate, cyber security should not be overlooked.
ON SUPPLY CHAIN
As most would agree, the end of Q1 was a logistical nightmare. An OP addressed how portfolio companies needed to figure out how to ship to secondary ports in China because the majority of demand (prior to the current environment) used to come from China. Then, once manufacturing came back online in China, the supply bounced back just as the demand diminished, and the OP’s portfolio companies did not have enough inventory to sell. The supply chain is starting to ease back to sufficient levels and is now seeing year-over-year growth in May, but saw negative growth in March and April.
Demand planning has been a challenge to say the least. With more uncertainty now than ever, our Host wanted to know what indicators others are referencing for demand planning – timeline (i.e. how far looking out) or solely the analyzation of raw data. One participant stated that because of the uncertainty, portfolio companies need to be reactive with their supply chain; some portfolio companies have built up inventory, but others are seeking out other suppliers. Our Host added that his firm is trying to get leading economists to speak with portfolio company leadership so that they can be proactive and have more finely-tuned intelligence at a regional and sector level.
Another OP indicated that his portfolio companies are predominantly in business services and that his “supply chain” is people. This led to the discussion of when to bring back employees who’ve been furloughed – especially when the demand is still so uncertain. The primary issue with bringing employees back is the associated fixed costs and market changes that would require the business to furlough those employees again, further complicating the current environment because of employees’ reaction to a possible second furlough.
Overall, the OP conversation has shifted from the logistical aspects of returning to work, to the need for proactive business plans during the “recovery phase.” Creating frameworks for Management teams, staying nimble in a rapidly changing environment, ensuring cyber safety, keeping a keen eye on supply, and implementing strategies to effectively demand plan are now at the top of OPs to-do lists.