high interest rates, A volatile economy, presidential election year uncertainty, and geopolitical turmoil have left private equity buyers and sellers starved of cash these days, waiting for exits and improved investment conditions.
But with thousands of CEOs running US companies for PE sponsors these days, the industry can't stay silent. So while the heads of portfolio companies continue to strive to maximize returns despite obstacles, PE firms are chipping away to free up some of the huge sums of money waiting to be invested in promising businesses. It is approaching.
“The prospect of a recession is still there, and interest rates have not yet come down,” said Amy Kadomatsu, CEO of Complicai, a fintech backed by K1 Investment Management. “There was some hope that interest rates would come down, but that hasn't happened yet. And there are other challenges in the market.”
Representatives from supporting companies attended chief executive officer A PE Support Leadership Summit was recently held in New York City to help you get through this difficult time. Here's some of what they heard and discussed.
2024 map
Stagnation is the biggest problem for PE-backed companies, owners, and the industry. “But PE firms have about $2 trillion of capital sitting idle, and the last thing they want to do is not use it in time,” said Tom Kemp, chairman of Northstar Travel Group. Ta. Here are some ideas he and others have shared to make the most of the situation in key areas:
Assess the current situation. Paul Aversano, managing director at Alvarez & Marsal Advisors, said “major geopolitical uncertainties” are fueling other global crises.
Jonathan Haas, Managing Director of Clarion Capital Partners, added: Although it has been somewhat resolved, the global war is perplexing for everyone. We've seen interest rates rise rapidly, and that could be the culmination. ”
Meanwhile, the number of PE firm exits has “decelerated dramatically,” said Marshall Phelps, managing director at PE firm MidOcean Partners. “So the limited partners are holding a lot of dry powder and are even more hesitant because they haven't had their capital returned.”
Meanwhile, the IPO market is stagnant heading into 2023, said Bob McCooey, vice chairman and global head of capital markets at Nasdaq.
Summit. “This is a buyer's strike. They know they don't have as much product, so they're waiting.”
Figure out the future. The usual uncertainty in presidential election years is exacerbated by the wild cards of the Ukraine war and the Israeli conflict.
“Markets don't like uncertainty, and there's a lot of uncertainty right now,” said David Erling, co-president of PE firm Solebury Capital.
Phelps said MidOcean “hopes to do a number of exits over the next two years.” [The firm is] We are actively preparing the business for sale, but timing is difficult as the sale process can take anywhere from four months to a year. ”
Mr Kemp, whose company is owned by Eagle Tree Capital, added: “Deals have dried up over the last few years, but there is a lot of pent-up demand for high quality.''
McCooey said demand for an IPO “certainly feels like it's pent-up.” Erling agreed, saying, “There's a huge backlog of companies that want to go public, especially industrial and consumer companies.” “Many people are looking towards the second half of 2024, when the Fed will set out its final direction on interest rates.”
And while high interest rates dominate the headlines, the debt is “quickly available,” Phelps said. The capital is there. ” Much of that is in the private bond market, “a big trend.” Kemp agreed with “signs of hope” in the private debt market, noting that “some commercial lenders are coming back in.”
Preparing for exit. CEOs, on the other hand, need to optimize their operations and prepare the story for the eventual exit. “Think about your own equity story, sometimes with the help of a third party,” Erling advised. “Categorize into five or six reasons why it's important to stock investors.” He said they need to stress test “financial reporting and the ability to generate earnings in a timely manner.” .
McCooey called on the chiefs to “act like a publicly traded company by reporting to the board every quarter on a date of their choosing.” Because as a public company, you can't decide the day before that you're not ready to report.
relationships with sponsors and vice versa. These relationships are “defined in the face of challenges and adversity, rather than how things are going when things are going well,” Kemp says. “Adversity reveals character and integrity, and how our partners respond and work with us determines our relationships.”
Don't make the mistake of “asking”. [sponsors] to run your business,” he said. “Or they say, 'Here's what we think.' They're financial investors. That's not their expertise. That's our job.”
However, Mr. Kadomatsu pointed out that a PE-backed CEO “must collaborate” with the owner. “Let them know where you're going and when you're going to get there. Also, if there's a speed bump, let them know and try to follow it. And you'll work it out.” ”
From an ownership perspective, Phelps said it's important to “look at how the executive team interacts.” “and [owners] To see how your team interacts during tough HR and strategy conversations, you need to be in the same room with your team, not on Zoom. Ultimately, that's where the CEO's personality comes into play. ”
Calculate with alphabet soup. Some leaders expressed fatigue with the ESG and DEI mantra from shareholder advisory firms, regulators, the media, and others. But ESG he is far from DOA. “80% of potential buyers want improved ESG scores,” Aversano said. “In this market, we need to look for ways to add value where we haven't had to before, and ESG is one of those ways.
“There are some fundamental things about ESG that no one can discuss,” he concluded. “If you're doing something that has less negative impact on the environment, how can that be a bad thing?”
Meanwhile, a recent poll by AlixPartners found that two-thirds of PE investors and their own CEOs agreed that DEI programs are very or extremely important.
“Currently, approximately 50 percent of the North American workforce is Gen Z or young Millennials,” said Ted Billiles, the company's global head of transformational leadership practices. “If you ignore the concerns of this group, you are ignoring them.” [them] Be aware of the risks. ”
Is the pricing appropriate?
Amid high inflation, high interest rates, and declining economic expectations, pricing is caught up in the vectors, confounding many leaders of PE-backed companies. “We were talking about increasing prices. Now we're talking about retention,” says Dave Clement (above right), partner at Simon-Kucher Consultants.
Below are 10 ideas from Simon-Kucher experts for leveraging pricing as a strategic and tactical asset, even in these times.
1. Simon-Kucher director and partner Bhavin Manjee (above, left) needs to understand how to set prices, including “what's within our control at the moment, given our contracts and customer arrangements.” says.
2. “Differentiate the pricing you need for different customers to meet your growth plans, rather than spreading it out to all customers like peanut butter,” Munsey said.
3. “Remind your customers of the value you're adding and clearly explain why.” Munsey adds, “Remind your customers of the value you're adding and clearly explain why.” Look at how you're delivering. What's the total value of all of this when you put it all together?”
Four. “Be honest about costs, especially when it comes to labor costs such as labor costs, which tend to be higher than other costs.”
Five. Mansey said it will alleviate pricing pressure by creating “cheaper alternatives with enough core elements that customers can get value at the right price points.”
6. Frame negotiations in terms of attributes, influences, and motivations. “Don't sell the hammer, sell the benefits of the hammer,” Munsey says. “It's super powerful.”
7. Streamline your discount program and stop giving away freebies to stores. Discounts “can be complicated” due to complex factors, he said. “There’s no visibility, there’s no transparency, and it’s destroying value.”
8. Start by taking a deep dive into your existing customers. “The cost of acquiring new customers is increasing,” Mansey said. “And existing customers have already bought into that value proposition, so expanding that relationship is an easier path.”
9. When it comes to loyalty programs, “it’s hard to change that structure. [So] I have long term lenses. How do you optimize your elements? And what are you solving for? Simple is best. ”
Ten. Clement said the strategy comes directly from the top but extends throughout the executive team. “Pricing is cross-functional; [to] Share data and drive change across your organization. It starts with the CEO. ”
