In an uncertain deals market, private equity firms need to maintain consistent approaches to integration to avoid post-close pitfalls.
In the midst of supply chain challenges, recruiting talent in a tight labor market, increasing borrowing costs, and a rising inflationary environment, business owners and their management teams must navigate myriad issues to maintain profitability and cash flow.
Research shows that private equity-backed companies fared better during the Great Recession than those not backed by private equity, because private equity-backed companies had access to more financial resources and were able to be more resilient to economic shifts.1 Some of the keys to success for many companies that survived that period were scenario planning for a variety of outcomes, reducing the company’s cost structure, and preserving cash to maintain profitability and cash flow as revenues declined. During the Great Recession, many private equity firms worked with their portfolio company management teams to implement cost reduction and cash flow management plans months before experiencing revenue declines associated with the downturn in business activity. By lowering their cost bases and preserving cash, many private equity-owned businesses avoided breaching covenants and debt payment defaults that might otherwise have resulted in bankruptcy.
Investors in private equity firms expect their partners to seek attractive risk/reward investments in both good and bad economic environments. In more challenging economic environments, it is critical that new business owners implement certain steps in the first several months of a new investment to increase the probability of realizing a successful investment later.