Staying Competitive in Tough P.E. Market: Have a Plan for Portfolio Companies

This is the third blog in the series “Staying Competitive in a Tough Private Equity Market.” The first post in the series provided recommendations of essential elements that private equity firms should implement to stay competitive, the second recommendation is: Have a Plan.

“The value in having a guiding strategy and staying focused on that strategy is maximized returns. When acquisitions are made without a plan in mind there are consequences: Sub-par execution that leads to lower valuations, slower growth rates, and wasted market opportunities.”

Private equity companies should always have a plan before, during, and after they initiate the process of finding the next acquisition. There are two levels of strategy to consider for each deal.

Portfolio strategy – Many private equity companies are industry-specific, while others are industry agnostic. The reasons for each strategy vary. We recommend that you identify your best strategy. Evaluate where you could maximize your returns. Is it by generically partnering with any management team? Or is it by being more hands-on and helping to decide the direction of the business?

There is also the aspect of the state of the business you will be targeting. Refer to the STARS framework we use for identification:

Some questions to consider: Will you be helping start-ups to grow, turning around distressed businesses, or taking successful businesses to higher levels; Are we prepared to deal with the growth and recovery cycles prone to happen? Each has its own opportunities and challenges.

Another aspect of your strategy is the hold time post-acquisition. What intentions do you have for the business? Will you strive for a swift turnaround and profit from the subsequent sale? Or Is your plan a long-term strategy that allows you to reap the benefits of incremental growth and finally make an exit.

Business strategy – During due diligence, the direction of the business becomes clear. Hands-on equity partners will participate in identifying the best path forward given the state of the industry and the competitive position. Use the strategic condition matrix below for some guidelines:

Ensure you understand the current competitive position of the business within its industry. The other aspect to consider is the stage of the business life cycle the business is at currently. Understanding those two variables and using the matrix above will help you envision the path forward and decide: Do we want to invest in businesses that are on a leading or lagging position within their industry? Or businesses that are in a start-up or mature stage? Furthermore, understanding the implications of the strategy needed to grow the business. Finally, you should answer: Are we able and willing to support such strategies considering our portfolio strategy and planned hold times?

In our next blog we will share insights into the next essential element for private equity companies to remain competitive: Improve the business.

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