By Daniel Callaghan
Companies backed by private equity are supposed to grow, to increase in value, and to do so quickly. They must be primed to implement strategy, manage costs, boost revenue, and ultimately provide the best enterprise value for owners. Everything is about improving strategy and operations to maximize the return on investment.
In a corporate world where change is the only certainty, here’s a fact about these companies: the most successful adapt fast and flexibly. Here’s another fact. While most of these companies believe they’re sufficiently flexible and adaptable, many are not.
PwC’s 2013 survey of private equity-backed portfolio companies contained a finding that resonates with even the largest and most stable publicly traded businesses. For operators in the private equity-backed space, the PwC assertion is particularly challenging: “The economic backdrop these companies face is a ‘new normal’ of relatively slower growth and greater uncertainty than in the past.” These risks, according to PwC, “remain weighted to the downside.”
How does a private equity-backed company deal with these uncertainties? In retail, fashion, travel and leisure, FMCG, and many other industries, how does it perform at strategic planning, conducting competitor analysis, managing expenses, increasing sales, and at the same time, allowing for variable economic conditions and fluctuating markets?
One answer is that the company buys in bespoke expertise — the detailed work tailored to deal with fluctuating scenarios — only when that expertise is needed and only for limited periods. In other words, the business buys the services of independent consultants. Critically, this allows the core team to avoid commitments of large fixed costs or the risk of onboarding individuals who subsequently prove incapable of delivering returns. And by using expert management consultants, the company remains adaptable and flexible – the qualities it needs to thrive.
Every company in early or development stages will have a core group: the CEO, the technologist, the business director, the operator, the finance manager. Beyond the core, there are options. As expansion accelerates in the drive for maximum value, is it necessary to hire a fulltime marketing executive? Is there a requirement to bulk up the staff with an advertising strategist? Does the business really need an SEO specialist or a market analyst?
Certainly, the revenue projections may justify all these hires. And that’s how it’s traditionally been done. But the gross margin might look substantially better if these chunks of expertise were acquired on a project basis, simply when and for the times they are needed.
Private equity-backed companies are by definition in the development or redevelopment periods of the corporate lifespan, with challenging and aggressive financial targets. In the favorable cases, the companies are in periods of rapid development, innovation, and sales growth. High speed requires minimal weight. It also requires maximum expertise. That’s the conundrum and the challenge for the business that wants to grow at pace and contain costs.
How many private equity-backed portfolio companies have the fulltime, in-house expertise to deal with regulatory frameworks, market assessment, pricing analysis, tax structuring, and more? How many are geared to generate the panoply of internal services and high-quality management information common to the major PLC? Not the majority, probably, and it’s likely not even necessary.
What private equity-backed portfolio companies really need is to understand what they don’t know: the insight to identify weaknesses and the flexibility to purchase the required information and projects, incorporate them, and proceed with the business of doing business.
Smart and selective use of management consultancy is a large part of what will keep private equity-backed portfolio companies lean enough to deliver optimum results.