3 Principles for Navigating Economic Turbulence as Private Equity Leaders

We had the pleasure of attending the recent Private Equity International Operating Partner Forum in New York, and were eager to note how PE Leaders are addressing the challenges brought on by today’s unpredictable operating environment.

In the first half of 2022, private equity (PE) generated $512 billion in global buyout deal value, setting the stage for producing the second-highest annual total ever. In the second half of 2022, things took a slightly different turn.  Inflation outpaced wage growth, the stock market repeatedly dropped, and interest rates rose, slowing PE deal pipelines. Ongoing ramifications from the pandemic and other major global events converged, making today a time of palpable uncertainty and continued volatility.  

We had the pleasure of attending the recent Private Equity International Operating Partner Forum in New York, and were eager to note how PE Leaders are addressing the challenges brought on by today’s unpredictable operating environment. Below are three principles that attendees repeatedly cited as crucial for navigating any period of economic turbulence:

1. Seize the opportunity created by the unpredictability.

PE organizations that are successfully navigating today’s challenges are prioritizing value drivers, rightsizing the portfolio companies, and taking a data-driven approach to decision-making.  

Headcount is usually the biggest line item.  PE Leaders are taking a data-driven approach to define the optimal headcount for each function and maintain objectivity.  They are linking the portfolio company’s strategy to the talent strategy.  They are asking - which functions will drive growth?  Does fractional talent make sense for some functions?

Some are evolving finance functions from cost centers to value creation centers. In other words, how can portfolio companies’ accounting and budgetary efforts go beyond simply keeping costs in line and contribute demonstrable value, either in terms of new revenue streams or operational efficiency gains? This tactic allows portfolio companies’ CEOs and CFOs to operate more effectively in an environment of low liquidity.

Finally, PE Leaders are urging their portfolio companies to resist the temptation to drop their pricing.  Although the current recessionary environment puts pressure on prices, dropping pricing is akin to panicking.  They prefer to guide the portfolio companies to work closely with customers to understand their pain points – and ensuring that the product or service resolves those pain points.  Maintaining the pricing structure and doubling-down on the product or value-add services is a stronger strategy.

2. Talent Strategy is as important as Value Creation Plans.

It’s simple: If the right talent doesn’t exist, PE organizations can’t be additive.  

Today’s PE Leaders are focusing on understanding their portfolio companies’ talent profiles beyond the leadership levels.  They are looking closer at department level talent.  For example, in the sales department, what is the hunter vs. farmer talent ratio (i.e. are employees better at prospecting or closing?).  What talent profile is needed to successfully navigate in the current environment?    

They’re also prioritizing succession planning and leveraging Organizational Network Analysis to identify high-potential leaders and influencers within portfolio companies. Rather than taking a reactive approach to succession planning, PE Leaders are working to pinpoint the strongest players in portfolio companies to proactively determine if those high-performers are suited for a leadership role, or even another role or department altogether.  They are engaging directly with employees to promote cultural unity, while also getting comfortable with the fact that turnover is an inevitable part of any growth story.  

Quality leadership is a risk mitigator, and PE Leaders are leaning heavily on their Talent Partners to ensure portfolio companies possess the necessary depth and breadth of talent and have the support needed to roll out talent initiatives like training and mentorship programs, performance management systems, etc.  

3. Data is your antidote to uncertainty.

When you can’t see an issue, you can’t address an issue. To mitigate uncertainty, PE leaders are breaking down the specific components of their value creation plans to accurately assess their recession readiness.  

They’re doing this by identifying data levers they can pull beyond just discounting, such as customer support and professional services, given their large impact on EBITDA. Additionally, PE Leaders are working with their portfolio companies’ CEOs and CROs to conduct Total Addressable Market studies, as this data can be used to grow existing customers and determine how to defend against competitors.

Lastly, PE leaders recognize that companies with strong cultures perform better. To overcome talent-related uncertainty, PE Leaders are measuring KPIs based on employee pulse and engagement surveys (attrition is a lagging indicator, and therefore not as useful). Those KPIs can then be tracked against recruiting spend to measure the tangible impact.  

Periods of economic turbulence are inevitable.  Savvy PE organizations are successfully and sustainably navigating ongoing volatility by prioritizing pragmatism, talent strategy, and data-driven decision-making.  

Entromy empowers PE Leaders to weather volatility and achieve key value drivers by providing real-time strategy and organizational analytics. Entromy's machine learning and natural language processing capabilities supply critical insights previously only accessible after days of lengthy interviews, expensive consulting engagements and time-consuming, manual effort. Reach out if you’re curious to learn more about our technology and how it helps PE organizations objectively identify and measure risk and opportunity within their portfolio companies, especially during periods of economic turbulence.