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PE Playbook: Building For The Right Exit

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Costly capital. Dead deals. Micromanaging sponsors. And a new wave of technology that promises even more powerful change and disruption. PE-backed CEOs are living through one of the most brutal periods in memory.

High interest rates, an iffy economy, the uncertainties of a presidential-election year and geopolitical turmoil have frozen private-equity buyers and sellers lately as they keep their dry powder dry, waiting for a better exit and investment climate.

But with thousands of CEOs operating U.S. companies for PE sponsors these days, the industry can’t stand still. So chiefs of portfolio companies continue trying to maximize returns despite the obstacles, while PE firms keep inching closer to unleashing some of the massive capital they are waiting to invest in promising propositions.

“There’s still a recessionary perspective, and rates aren’t going down yet,” said Amy Kadomatsu, CEO of ComplySci, a fintech company backed by K1 Investment Management. “There were expectations rates would decrease, but that hasn’t happened yet. And there are other challenges in the market.”

Chiefs of sponsored companies attended the Chief Executive PE-Backed Leadership Summit in New York City recently to get advice for navigating these difficult times. Here’s some of what they heard and discussed:

A Map for 2024

Stasis is the biggest problem for PE-backed companies, owners and the industry. “But there’s something like $2 trillion in capital sitting with PE firms, and the last thing they want to do is not spend it during their period of time,” said Tom Kemp, chairman of Northstar Travel Group. Here are some ideas he and others shared about making the best of the situation in crucial areas:

Assessing the status quo. “Geopolitical uncertainty in a big way” has added to other global woes, said Paul Aversano, a managing director of Alvarez & Marsal advisors.

Jonathan Haas, a managing director of Clarion Capital Partners, added, “Last year, we were concerned about recession. That has somewhat dissipated, but global war is disconcerting to everyone. We’ve seen rates rise precipitously, but that may be cresting.”

The number of PE exits, meanwhile, “has slowed dramatically,” said Marshall Phelps, managing director of the MidOcean Partners PE firm. “So limited partners have a significant amount of dry powder and also are not getting the capital returned to them, so they’re being more hesitant.”

Meanwhile, the IPO market has been dead in the water for 2023, said Bob McCooey, vice chairman and global head of capital markets for Nasdaq, which hosted

the Summit. “It’s a buyers’ strike: They’re waiting because they know there’s not a whole lot of product.”

Get a handle on the future. The usual uncertainties of a presidential election year have been compounded by the wild cards of the Ukraine war and conflict in Israel.

“Markets don’t like uncertainty, and there’s a lot of that right now,” said David Earling, co-president of the PE firm Solebury Capital.

Phelps said MidOcean would “love to have a number of exits over the next two years. [The firm is] actively preparing businesses for sale, but it’s difficult to time things because the sales process can take four months to a year.”

Added Kemp, whose company is owned by Eagle Tree Capital, “Deals have dried up over the last couple of years, but there is a lot of pent-up demand for quality” companies.

McCooey said demand “does feel pent-up” for IPOs. Earling agreed: “There’s a strong backlog building of companies that want to go public,” especially in industrial and consumer companies, he said. “A lot of folks are focused on the second half of ’24 as the Fed works out, hopefully, its final direction with interest rates.”

And though high rates dominate headlines, Phelps said, debt is “readily available. The capital is there.” Much of that is in private debt markets, an “enormous trend.” Agreeing on “some signs of hope” in the private debt market, Kemp noted that “some commercial lenders are getting back in.”

Preparing for exits. Meanwhile, CEOs should be optimizing operations and preparing their narratives for exits that will come eventually. “Think about your equity story, sometimes getting help from a third party to think about it,” advised Earling. “Break it down into five or six reasons that would matter to an equity investor.” Stress-test “your financial reporting and ability to put out earnings on a timely basis,” he said.

McCooey urged chiefs to “act like a public company in reporting out to the board every single quarter on the day you chose. Because as a public company, you can’t decide the day before that you’re not ready” to report.

Relating to sponsors and vice versa. These relationships “will be defined not on how things are when they are going well, but when you face challenges and adversity,” Kemp said. “Adversity reveals character and integrity, and how partners respond and work with us defines the relationship.”

Don’t make the mistake of “asking [sponsors] to run your business,” he said, “or say, ‘This is what we’re thinking about.’ They’re financial investors; that’s not their expertise. That’s our job.”

Yet, PE-backed CEOs “must have alignment” with owners, Kadomatsu noted. “Ensure they know where you’re going and when you’ll get there and that, if there’s a speed bump, you’ll let them know, and you’re on it. And you’re going to solve it.”

From the ownership perspective, it’s important “to observe how the C-Suite team interacts,” Phelps said. “And [owners] need to be in the room with the team, not over Zoom, to see how they interact with each other in hard conversations about personnel and strategy. That’s where you see the character, ultimately, of the CEO.”

Reckoning with the alphabet soup. Some leaders expressed fatigue with mantras about ESG and DEI from shareholder advisory firms, regulators, the media and others. But ESG is far from DOA. “Eighty percent of potential buyers like an improved ESG score,” Aversano said. “In this market, you have to look for ways to add value where you historically have not had to, and ESG is one way.

“There are some foundational things about ESG that no one can argue,” he concluded. “If you are doing things that are less negatively impacting the environment, how can that be a bad thing?”

Meanwhile, two-thirds of PE investors and CEOs of their companies, in a recent poll by AlixPartners, agreed that DEI programs are either extremely or very important.

“Today, about 50 percent of the North American workforce is Generation Z or young millennials,” said Ted Bililies, global head of the consulting firm’s transformative leadership practice. “If you ignore the concerns of this cohort, you ignore [them] at your peril.”

Is the Pricing Right?

Pricing has been caught in a vector amid high inflation, high rates and falling economic expectations that befuddle many leaders of PE-backed companies. “We were talking about raising prices; now we’re talking about retention,” said Dave Clement, partner of Simon-Kucher consultants (above right).

Here are 10 ideas from Simon-Kucher’s domain experts for wielding pricing as a strategic and tactical asset even in these times:

1. Understand how to configure pricing, including “what is within your ability to control now, considering contractual and customer agreements,” said Bhavin Manjee, a Simon-Kucher board member and partner (above, left).

2. Differentiate what pricing you need from various customers “to satisfy your growth plan,” Manjee said, “not spread it like peanut butter over all customers.”

3. “Remind customers of the value you’re adding and articulate the reasons.” Manjee added, “Look at every single attribute of the product value proposition and how you’re performing on that. What’s the total value you’re delivering when you put them all together?”

4. “Be honest about your costs, particularly if they are human costs such as labor rates, which tend to be sticker than other costs.”

5. Alleviate pricing pressure by creating “less expensive alternatives, with enough core stuff in them that customers can get value out of them at a fitting price point,” said Manjee.

6. Frame negotiations in terms of attributes, impacts and motives. “Don’t sell the hammer, but sell the benefits of the hammer,” Manjee said. “That’s super powerful.”

7. Rationalize discount programs to stop giving away the store. Complicated elements “can sometimes compound” discounts, he said. “There’s no visibility or transparency, and they’re destroying value.”

8. Dig deeper with existing customers first. “Acquisition costs for new customers are increasing,” Manjee said. “And existing customers already have bought into the value proposition, so the ability to grow that relationship is the easier path.”

9. When it comes to loyalty programs, he said, “It’s difficult to change their structure. [So] have a long-term lens. How do you optimize elements, and what are you solving for? We advise simplicity.”

10. Direct strategy from the top but across management, said Clement. “Pricing is so cross-functional that you need [to] share data across the organization and drive change. It starts with the CEO.”


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