The threat of the coronavirus (COVID-19) continues to grow, and Operating Partners are fighting to support their portfolio businesses. Egon Zehnder gathered senior members from the European Operating Partner/Value Creation community on April 15, 2020, for a virtual meeting to share key insights and lessons learned-this is what we heard.
Buy time, protect the balance sheet, and act quickly:
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Look at the cash burn rate and figure out how much cash will be needed in the worst case scenario (including the amount to be re-injected)
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Be aggressive, maximize runway, and draw on all lines
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Define the optimal capital structure to deliver on the strategy and negotiate with banks
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Stabilize the people side of the business, and safeguard employees
Draw on all credit lines, talk to all your lenders, ask your sponsors to earmark dedicated capital for your portfolio. Your cash pile will determine the length of your runway.
This crisis is unprecedented, and some of the main differences from the 2008 financial crisis include:
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The call for empathy and social responsibility
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Fundamental changes in behaviors
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The need to adapt to virtual communications instead of working on the front line
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The scale and speed of the decline given the general shutdown across sectors and geographies
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The complexity created by the manner of government intervention this time around
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The uncertainty on outcomes, which makes planning a recovery difficult
Think the unthinkable, JV with your competitors, trade distressed assets with each other for overall better portfolio risk profile.
PE firms have to behave responsibly with employees and all other stakeholders – we can’t just go for short-term financial gain.
A shift in the governance model is required:
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Communicate even more, increasing the rhythm of discussions with stakeholders
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Find ways for teams to be efficient while working remotely
If in doubt, default to more frequent communications rather than less.
The inability to work together in person and have a war room environment with advisors is a challenge this time around.
New and enhanced skills and capabilities are required today:
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Realize management teams might require different skill sets to face the crisis, evaluate them and supplement the skills they may need to face this crisis situation with expert help
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Relying on in-house capabilities is not enough: leverage external auditors and lawyers
Because a lot of our portfolio management have not seen anything like this before we can step in and help more.
Protecting operations is paramount, and the international and multi-sector characteristics of portfolios will add to the challenge:
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Get ready to use dry powder to avoid distress
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Be agile given all sectors are impacted in their own specific way and companies at the extreme ends of the spectrum will require different forms of support (e.g., resolving supply disruptions in food retail vs. figuring out government support networks in other sectors)
Building a plan beyond today is difficult, and we cannot predict what recovery will look like. Some suggestions include:
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Consider the most severe dislocation across all key dimensions: staff, customers, suppliers and means of production
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Ensure you have the ability to bounce back when the recovery happens
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Inspire your team around long-term aspirational goals: operating in survival mode can only last so long
I don’t believe the economic forecasts I am reading – particularly as it pertains to bounce-back.
We have to look at all transformation options. It is no longer the CEO or CTO driving the digital agenda but COVID-19.
In the UK, we assume 3 months with zero activity and up to a year for things to get back to some sort of normality, irrespective of what this normality may look like.
