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Knowledge  |  03/19/2020  |  Nick Leopard & Atul Aggarwal

COVID-19: The Accordion Framework for PE Sponsors

COVID-19: A Practical Framework for Private Equity Sponsors

By Nick Leopard, CEO & Founder and Atul Aggarwal, President

As we enter a now inevitable downturn, ‘value’ will become more important than ever. COVID-19 places an ever higher, and more urgent, need to get very surgical and specific about how each portfolio company will survive (over the next few years), and thrive (on the upswing). Without this surgical and specific view, value stabilization at the fund level simply won’t happen, now. And, value creation won’t happen later – on the other side.

In order to make it happen effectively, we need to talk about the right-now granular implications on individual investments and how to manage those in aggregate. In other words: practical advice for sponsors on portfolio operations.

VIEW FRAMEWORK

Portfolio of Uncertain Performers

Let’s be clear, this is a singular event for sponsors used to a portfolio where the vast majority of companies are meeting expectations. Sure, there’s always the underperformer (or 2 or 3 or 4) – the portfolio company whose progression has stalled or gone sideways, but they’re more the exception than the rule.

Graphic: Integrated Program for Sponsor-Level Downturn Management
Click on the ‘View Framework’ button (above) for a detailed guide.

The pandemic – and the related financial instability – won’t necessarily mean that every company will be an underperformer. But it does mean that sponsors need to now view almost every company within their portfolio as an uncertain-performer.

That’s unchartered territory, that brings to the fore a host of new challenges for sponsors:

  • How do they address current portfolio instability en masse?
  • How do they simultaneously assess multiple investments, individually?
  • How do they identify the portfolio companies that will be most responsive to early and ongoing sponsor intervention?

Traffic Light Portfolio Categorization

The latter is a particularly critical question – because it recognizes that not all portfolio companies will be impacted equally. And, even if they are, not all companies will need similar levels of sponsor support. It also, frankly, recognizes that some investments will be so disproportionately impacted by the pandemic that the return on intervention might not equal or exceed the resources needed to do so. Some might just be too far gone. The essential sponsor step here, (in order to understand where and how to focus support), is to categorize their portfolio using a traffic light matrix:

  • (Green) Healthy Portfolio Companies: These are the portfolio companies who are either stable, or are in industries seeing an uplift in demand (on the latter, think online retail, certain sub-sectors of healthcare, at-home personal fitness, etc.). Sponsor lift here will be around commercial excellence, pricing, inventory planning, etc.
  • (Yellow) At-Risk Companies: Companies that are at risk of significant underperformance, but that, with effective cash management and value stabilization initiatives, can be saved. Sponsor lift here will be around liquidity management, 13-week cash flow forecasting, SG&A rationalization, contingency planning, and lender management. It will also consist of more operational initiatives like footprint optimization, SKU rationalization, and automation.
  • (Red) Restructuring Situations: If we do our job right in the yellow zone, many companies can avoid the red. But, for those still nearing insolvency, sponsor lift will be heavy, consisting of many yellow bucket initiatives as well as interim and crisis management, and restructuring.

Accordion’s COVID-19 Framework

How can sponsors categorize/color-code their portfolio scientifically and strategically? And, how do they understand the real pandemic implications to their portfolio companies beyond just guesstimating?

The path to green, yellow, red is not black and white. There’s no clear-cut approach, just as there are no true COVID-19 experts. We’re all learning as we go. But, at Accordion, there are experiences and expertise we can draw upon to help sponsors navigate this portfolio-wide undertaking – specifically, learnings from performance improvement scenarios from which we can develop a framework of integrated workstreams to help sponsors assess, categorize, and address their portfolio. As such, we’ve identified the 4 critical workstreams to enable portfolio categorization. They are:

  • Workstream 1: Establish a Program Management Office (PMO)
  • Workstream 2: Ensure Continuity of Business (COB) for Portfolio Companies
  • Workstream 3: Diagnose the Financial Outlook Across the Portfolio
  • Workstream 4: Identify the Game-Changers; Make Immediate Decisions

VIEW DETAILED WORKSTREAMS

About the Authors

Nick Leopard
Nick Leopard
CEO & Founder

Nick Leopard is the CEO & Founder of Accordion, the go-to partner to the private equity community. Founded in 2009, Accordion has grown to serve nearly 200 of the world's premier private equity firms and their portfolio companies – driving value creation through financial consulting services and portfolio operations technology. Before launching Accordion, Nick was part of the investment team of a $200M mezzanine debt fund, BHC Interim Funding, L.P., which focuses on short-term investments in companies with $50-$500M of revenue. Prior to BHC, he was a member of the FIG Investment Banking Department of Bear, Stearns & Co. LLC.   Read more

Atul Aggarwal
Atul Aggarwal
President

Atul became the President of Accordion in 2019. He joined Accordion from Bain & Company, where he was a Partner in the New York office. During his 20-year career at Bain, Atul worked for both corporate and Private Equity clients. He spent his early years working across a variety of assignment types, including: M&A and carve-outs, strategy, cost, customer experience, and organizational work. More recently, Atul was focused exclusively on major transformations for some of Bain’s largest clients – leveraging a blend of traditional value creation levers with the more “human” aspects of successful transformations, such as leadership and executive coaching, behavior change, and change management techniques.   Read more