Private Equity Virtual Round Table – View from the Portfolio

Since the Covid-19 pandemic brought vast swathes of the economy to a screeching halt, businesses have been reacting to a stream of constant challenges. Many exit goals were simply shelved and pre-Covid business plans left in shreds. The glue that binds Private Equity backers to successful management teams, the alignment of their economic interests, will come under scrutiny as delivery of revised business plans with new, realistic exit aspirations, are formulated. A number of options are available as to how an equity incentive plan might be revised to ensure the continued alignment between management teams and sponsors, dependent clearly on various economic, commercial, tax and legal implications.

Against this backdrop, Stuart Jansze, Marcus Shah and Louise Chaplin gathered a group of PE portfolio company board members to discuss the state of the market, incentivisation and the outlook for the near future. Here are their key takeaways:

Investment environment

Investment has, unsurprisingly, been very challenging in certain sectors. Just as sectors such as leisure and consumer were beginning to find their feet in a re-opening economy, the re-imposition of Covid restrictions by the government caused another sudden drop-off in consumer spending. This translates into challenges for private equity funds to get deals past their Investment Committees.

Many deals that were close to completing at the start of the pandemic were pulled, but some are now being re-tabled after detailed renegotiation. Family Office funds have more flexibility and so are better placed to take advantage of opportunistic M&A opportunities that present themselves as a result of the pandemic.

While April to May of this year was cataclysmic and a cause of major concern for the private investment community, there was cause for cautious optimism as the summer progressed.  There was a sense of positivity around B2B transactions generally, and some highlighted clear ROI opportunities for technology investments in particular.

Management teams and incentivisation

Our group shared a sense that a significant change in business practices is on the horizon. The pandemic has resulted in some exceptional business leaders coming unexpectedly onto the market and resultantly, funds, in recognition of this, are seizing the opportunity to both bolster and re-shape certain of their portfolio management teams with this newly available talent pool.

Management incentives were also a hot topic. In one example, the mid-market PE backer of a smaller company, with some 100 employees, recognised the need to, and were happy to, re-incentivise the management team. Other referenced the value of spreading the equity wide across the business, with the advantages that can bring in terms of building commitment and loyalty.

However, the consensus was that it is probably too early to reset equity broadly. Wildly fluctuating EBITs mean valuations are hard to calculate right now. The speed at which equity valuations are changing is unprecedented.

Good communication and a clear roadmap have been key to keeping value creation plans on track as best as possible throughout the pandemic. CEOs commented that regular communication with the board during the pandemic has built huge amounts of trust. This has better enabled successful leadership through the crisis, sometimes enabling the Chair and Management teams to become closer to their PE investors.

PE backers are especially reliant now on experienced management teams, particularly those who have led through previous exits and who know how to navigate difficult circumstances. To this end, succession planning has taken a back seat during the worst days of the pandemic, with the focus being squarely on survival.

As activity picks up, we will remain in close touch with our PE network and will share evolving trends in our next blog.