When the going gets tough: Managing underperforming investments
… continued from The seven deadly sins of portfolio management …
“Management were open and took a ‘no surprises’ approach to dealing with the private equity firm. The private equity director didn’t try to push the bad news under the carpet but discussed with them what to do about it and gave constructive advice and suggestions. The management team responded very well to this approach.” – COO, IT sector
Most of the seasoned executives and non-executives interviewed for the survey had experienced situations where a business underperformed against plan. When the going gets tough, the relationship between management and private equity backers can come under strain.
When this happens, private equity directors naturally become concerned at the potential threat to the value of their investment and need to be very aware of how their skills can help, rather than make things worse. The non-executives and executives interviewed for this research suggested constructive actions that private equity directors could take to help address underperformance.
Actions that help
- Really understanding the business; get beyond the spreadsheets.
- Working with management collaboratively to find solutions to business problems.
- Staying calm, being aware that all parties come under pressure during difficult times.
- Refinancing and restructuring the balance sheet to give the company breathing room.
- Bringing in operational expertise from a network of experts.
Actions that hinder
- Being indecisive.
- Getting too much into the detail so that the big picture is lost.
- Lacking empathy with management; often they are doing the best they can.
- Failing to stay around to clean up the mess once the equity value is gone.
According to Onno Sloterdijk, Head of KPMG Private Equity EMA Region in the Netherlands:
“Underperformance may move the relationship between the private equity firm and management from one of alignment to possibly a more combative one, especially if the private equity house perceives that management is underperforming.
If action is required to supplement or change management, then shareholders need to act decisively to avoid the risk of further damage to the business. Unsurprisingly, the survey revealed more negative comments on the behaviour
of private equity firms when businesses underperformed, but also gave useful pointers on which actions help and which actions hinder. The key takeaway is to recognise the changing nature of the relationship and if management are to be retained, then working collaboratively becomes key.”
Feedback from survey respondents
“When things go wrong, private equity directors tend to start trying to manage the investment more closely. However, unless they really understand the business then their input isn’t usually very helpful. The better a private equity director understands the business, the easier it is to identify issues at an early stage so they can be dealt with before becoming nasty surprises.” – NED, FMCG sector
“When an investment underperforms, there is a tendency for them to want to run around and do things; demanding regular updates and conference calls. This is all about being seen to be taking action rather than really contributing to finding a solution.” – CEO, Chemicals sector
“There are bound to be some up and downs in the relationship if the business isn’t performing according to plan, but the important thing is whether or not management and investor can work together and keep focused on the main goal of achieving a good exit in due course.” – Chairman, Business Services sector
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