It’s safe to say that the realities of 2020 have disrupted whatever neat business plans America’s senior executive corps presented to their board last year. The typical contingency plan incorporates a small decline in sales, on the order of 5% – 10%, not the wholesale disruption of industries and distribution channels. Even if executives had been given an accurate forecast, it would not have been believable.
Six months into the crisis, we can identify some broad themes to help chart a path forward. First, there are strong headwinds in place for any business which relies on a large face-to-face assembly of people, such as movie theaters and entertainment venues. Second, the shift from office work to working from home is reshaping the supply chain for many basic necessities, which are moving through grocery stores and e-commerce instead of commercial distributors. Third, many businesses are financially challenged by customers who cannot buy – or more importantly, pay – at the same velocity as before. The typical business cannot sustain a 30% decline in demand without major changes in operations and staffing.
On the other hand, opportunities abound. Many of these trends involve shifting demand from one channel to another, redirecting consumer interest from activities that are dangerous to safer pastimes. For example, Home Improvement store sales had a brisk spring, fueled by consumers unable to attend sporting events or hang out at bars. As the away-from-home commercial distribution channel slowed, demand for e-commerce and logistics services has grown rapidly. Countless professionals have adapted their businesses to help customers over Zoom video meetings, offering everything from fitness classes to psychotherapy. Life goes on.
The narratives of successfully navigating 2020 will be dominated by themes of spontaneous reinvention. Between disrupted distribution channels and tight capital markets, executives need to creatively adapt their people, processes, and resources to create value in new ways. For a private equity firm, this goes beyond ensuring the immediate safety of your investment team and working with your portfolio teams to create value.
For a closer look at how private equity firms are helping their portfolio companies weather the storm, we ask the leadership team at Lincolnshire Management to share an example of how they’re working with their businesses. This isn’t Lincolnshire’s first recession: this New York based private equity firm has been in business for over thirty years, investing in over 90 businesses. Lincolnshire Management’s experience includes navigating market turmoil in the early 90’s, the dot-com bust, and the housing crisis.
Prepare in Advance
While you cannot predict a crisis, it pays to have your house in order before the storm begins. Within the private equity world, this comes down to some basic elements. Your investing team needs to have great discipline, pricing deals to provide a margin of safety and ensuring the resulting business has a reasonable amount of leverage. Debt, a powerful tool in the bull market, can become deadweight when the economy slows. Your portfolio company teams need strategic focus, through setting operating priorities and a well built plan for achieving your goals for that investment. These are good ideas in any market.
“To be frank, our standard operating approach is designed in anticipation of the unknown.” commented Michael Lyons, Lincolnshire’s president. “Every deal has a surprise or two, something that you won’t see until you’re deep in the business. Our operating teams work to ensure these are good surprises, using their knowledge of the industry to create competitive advantage. Our investing teams are trained to leave a financial structure after the deal is closed which gives us flexibility, by avoiding overpaying for deals and keeping debt to a minimum. So when we find a surprise, we can make the most of it.”
From there, preparation becomes a matter of making sure your team’s downside is covered. Installing good financial discipline at portfolio companies is crucial, especially in areas like expense controls, cash forecasting, and credit monitoring. Your financial reporting process is a great early warning system.
“We did a financial assessment as soon as the outbreak began,” Michael commented, “testing each of our businesses against a worst case scenario to confirm they had adequate liquidity. Once you’ve got your downside under control, it gets easier to be bold about opportunities you find along the way.”
Invest In Strong Management Teams
When you’re investing in services, it is critical to find the strongest management teams and support them through any required change initiatives. Lincolnshire Management’s approach to investing is highly focused on operational improvement: the firm has between two and four dedicated operating professionals on their team at all times. But this focus on people actually starts with the deal process.
“One of the key reasons we started direct sourcing our deal flow was the additional time it gives us to get to know the management team,” commented Thomas Callahan, a Lincolnshire managing director, “We’re looking for the right leadership, managers who are able to set realistic goals and own them.”
This focus on relationships and operational expertise has played a key role in helping portfolio companies navigate the crisis. This was apparent at Powerhouse, one of Lincolnshire’s portfolio companies in the building services space, where Lincolnshire partnered with the management team to adroitly reposition the business for success as the events of 2020 played out.
Faced with shifting demand for office space and retail services, Powerhouse rapidly assembled a service offering in March 2020 to meet a growing market for Covid-19 related services. They were able to tap into their existing pool of contractors to help retailers and property managers redesign workspaces and store environments to reduce the spread of Covid-19. Powerhouse also assembled a package of interior and exterior sanitization services, delivered through their nation-wide network of subcontractors. This offering was delivered through Powerhouse’s existing technology and project management platforms.
Once the core elements of the offering were in place, Powerhouse found a technology partner to give their offering a competitive advantage. They found one in Allied BioScience, a biotechnology company with a unique chemical for preventing infection from surfaces. The new program launches this fall.
“We’re very pleased to help businesses mitigate the impact of Covid-19”, Philip Kim, a Lincolnshire managing director, commented, “In fact, we’re looking at this as a growth vector going forward. We see plenty of opportunity in hospitality, retail, and healthcare.”
In this example, prudent management, strategic focus, and creative thinking about how to adapt to an evolving market carried the day. It starts by recruiting the right people and forging strong partnerships.
