As the world responds to a possible recession, geopolitical conflicts, and supply-chain disruptions, private equity portfolio companies must prepare for the economic downturns that can hamper growth strategies.

Reduced investor risk tolerance, depressed company valuations, and longer hold times to achieve investment thesis are on the horizon for firms that don’t proactively fortify their businesses.

With our combined decades of experience working with thriving private equity firms and their portfolio companies, Bespoke Partners knows the key to riding out turbulent times is proper leadership. The most successful and seasoned leaders across every major business function know how to manage economic uncertainty with minimal impact on the bottom line.

After placing hundreds of high-performing executives in private-equity-backed companies, Bespoke is intimately familiar with the skills and leadership capabilities that permit a leader to excel despite economic headwinds.

In this posting, I share the most effective strategies and actionable tactics for private equity firms to maximize portfolio company growth and stay on the investment thesis course.

We discussed a number of these topics in our recent webinar with Hunt Scanlon and Steve Maxwell from Audax Private Equity. If you missed it, you can catch the replay here. 

Industry-Wide Headwinds

It’s important to recognize the most critical obstacles portfolio companies face as the market becomes bearish.

First is a “debt squeeze,” which happens when banks and other lenders tighten financing requirements, making it harder to fund new projects. This is compounded if lenders operate with a herd mentality. Until lenders see others willing to finance new projects, they may hesitate to extend the same credit they previously made available. The most effective leaders secure lines of credit before market conditions worsen and lenders stop authorizing new financing.

Second is a likely slowdown in gross sales. As businesses and consumers anticipate a recession they tend to cut back on non-essential spending. A portfolio company’s business growth trajectory will likely be impacted. Of course, investment thesis modeling considers such scenarios. The key is to put in place executives with the FP&A skills to recognize the impact signs and adjust course as needed to compensate.

Third, capital and public markets may soften, valuation growth may slow or valuations may decline, and investment hold times may lengthen as attractive exit opportunities decrease. Again, private equity firms factor in such scenarios, but it becomes critical to have leadership in place that realistically assesses the ongoing status of value creation plans and takes operational action to compensate to keep plans on track.

Leaders Who Thrive

Now, we will dive deeper into the skillsets of functional leaders who excel in turbulent times based on our experience with placing highly effective leadership at portfolio companies.

Guiding the Organization: CEO

As the head of the enterprise, the CEO is expected to orchestrate successful strategies across the entire business.

Bespoke has found that CEOs who came up through the go-to-market disciplines often lead their companies out of economic downturns stronger than before. They bring a unique combination of sales, business development, and marketing expertise to unearth and evaluate growth opportunities that become available while their competitors are operating in a defensive mindset.

This might be a pivot to a tangential market that is underserved because of a competitor’s failure. Executing on the opportunity takes investment, which runs counter to the bunker mentality that often takes hold during a downturn.

This market expertise aligns with the second characteristic of CEOs that emerge from economic downturns stronger than before: successful M&A experience. During times of market uncertainty and contraction, valuations soften and acquisition opportunities emerge. CEOs with a demonstrated M&A history can pursue discounted growth opportunities that lead to outsized returns once the economy bounces back.

Such strategic moves may involve buying a distressed competitor to expand market share, acquiring an upstream supplier to integrate vertically and expand product offerings, or merging with a related-sector company to expand addressable market.

Above all, the CEO should ensure the organization’s strategy and growth plans are clear. Go-to-market growth advisory firm SBI found in its recently published annual CEO survey that too many CEOs are planning in a reactive fashion as economic headwinds affect the business climate. “This year we see more hedging in growth options and less strategic clarity,” the survey report authors wrote. “Our interviews confirm this trend, with the word ‘agility’ frequently attempting to mask strategic uncertainty.”

Protecting Financial Resiliency: CFO

CFOs operate as highly trusted stewards of a business’s financial health and those skillsets are roundly tested during economic slowdowns. In our experience, CFOs who are efficiency experts produce remarkable value for their firms during times of uncertainty. Companies are expected to “do more with less,” and this efficiency approach requires creativity and discipline.

Many companies may be tempted to cut as much overhead as possible to conserve resources. Cutting unneeded expenses to optimize the business is a best practice in any economic conditions. We find that CFOs who enforce operational discipline even when times are good are better prepared to weather a downturn.

We also see that the most effective CFOs prioritize efficiency over across-the-board cost cuts. These CFOs keep the organization lean while being clear-eyed and open-minded about making investments to stay competitive and take advantage of opportunities that emerge in turbulent times.

CFOs who are integration experts also are critical to support CEOs engaging in M&A opportunities. These CFOs bring FP&A skills to analyzing prospective acquisitions and resulting outcomes.

They ask: Will an acquisition produce immediate cashflows but require longer-term investment before realizing full potential? Is a competitor under-valued? Which parts of a targeted business can be sold? What’s the best structure for integrating an acquisition?

CFOs who can answer such questions will help their companies emerge from a downturn positioned to thrive.

Go-To-Market Leaders: Sales, Marketing, Business Development

The teams responsible for revenue and market expansion play a critical role weathering a downturn.

One of the most valued skills for GTM leaders is situational awareness. Many times, the frontlines of your organization are hearing market feedback and competitor information first. GTM leaders with “their heads on a swivel” will identify opportunities for growth and expansion as market conditions affect competitors or shift spending.

Another GTM skillset important in turbulent times is the ability to manage a channel. Sales leaders who can orchestrate new distribution and resale opportunities will help to diversify into new markets and revenue streams. This helps to insulate the business from over-reliance on any one channel and unearths unique opportunities available during economic downturns.

Human Resources Leaders

HR leaders who drive the business forward during downturns have two coveted skillsets: They target and attract the right talent, and they can retain the existing talent.

When the economy slows, talented workers are likely to become available as firms cut jobs. Effective HR leaders use these opportunities to supplement staff and position the company to grow faster.

In addition, HR leaders most effective in a downturn foster a strong company culture that helps employees deal with uncertainty and remain focused on execution.

Operations and Technology Leaders

Operational leaders who help their companies get ahead even in turbulent times are tech-enablers. COOs and CIOs with this skillset select tools that automate and streamline company processes, reducing costs while still delivering high quality products and services.

Similarly, skilled product and technology leaders, such as CTOs and CPOs, know how to use a downturn to identify vulnerable competitors or attractive licensing opportunities that can plug product line gaps or extend product lines to address new customer segments.

Thriving in Turbulent Times

The simple thread running through all these leadership observations is that effective leaders treat an economic downturn as an opportunity.

These leaders know a challenging economic climate can position them to capture market share, enter new markets, enhance product lines, recruit top talent, and set the stage for explosive growth in the market upturn to follow.

Get in touch today, and we will explore how our strategies will work for you.