Four Steps To Boost Portfolio Company Performance In the Coronavirus Economy

This is the time when firms with operational experience must flex their muscles and dig in deep to help their portfolio companies manage through this unprecedented health crisis.

By TJ Maloney, Lincolnshire Management

The rapid global spread of COVID-19 has prompted a swift and thoughtful response by both the public and private sectors. As local, state and federal officials enact policies and encourage behavior changes to flatten the curve, private equity firms must do more than ever to help management teams successfully navigate the financial and operational challenges the coronavirus crisis presents.

This is the time when firms with operational experience must flex their muscles and dig in deep to help their portfolio companies manage through this unprecedented health crisis. It is vital to develop and execute strategic plans that focus on four main areas: cash and liquidity, customer and vendor terms, employee engagement and communication and creation of a COVID task force.

Cash and Liquidity – As we suddenly find ourselves possibly approaching a recession, investors need to keep an increasingly close eye on portfolio company cash flows. Detailed information on cash on-hand, cash drawdown, sequestered cash, availability, liquidity runway and covenant compliance must all be easily accessible at any time. It’s also important to anticipate potential near-future credit needs, address how those will be met and proactively keep lenders informed of cash flow developments. This includes potential government aid and benefit programs, which is addressed under the COVID task force section.

Customer and Vendor Terms – The pandemic will likely have a significant negative impact on most companies’ customer orders and vendor offering availability. Given the many unknowns, projections should be conservative and assume the ramifications of coronavirus will last longer than v-curve recovery scenario would suggest. Rather than sticking to previously agreed terms, companies need to pro-actively offer customers more flexible solutions while carefully monitoring credit conditions and considering risk-shared reward arrangements. Similarly, companies need to work with vendors to negotiate extensions on payable terms, rents, insurance premiums and expenses in exchange for productive longer-term partnerships.

Employee Engagement – Regular and transparent communication can help mitigate employee uncertainty during this difficult time, even when furloughs, layoffs and salary reductions must be implemented. It can also go a long way in keeping employees productive. For essential businesses that are continuing to operate with some employees on site, job one should be ensuring employees’ safety and health. This includes taking appropriate actions such as regular deep cleaning, sanitation protocols and enforcing social distancing policies. If employees are working remotely, take steps to continually and regularly update teams virtually. If companies are planning furloughs, find ways to update and engage affected employees who might not have access to company email in an effort to manage the high cost of turnover and retraining as business rebounds.

COVID Task Force – The landscape—from state, federal, and international government aid packages to insurance coverage to the regulatory environment—is evolving quickly and will have a big impact on portfolio company recovery. To stay up to date and positioned to act quickly, firms should create a COVID Task Force to share best practices and resources internally and across the portfolio. The COVID Task Force should have a good a handle on what is applicable to your portfolio companies, how guidance around these programs is constantly changing and how best to implement them with your management teams.

The coronavirus has affected portfolios in nearly every industry and created a lot of uncertainty. As businesses work to meet the current challenges, there is a unique opportunity for private equity firms to demonstrate the greater value of their partnership by providing operational expertise and giving strategic guidance and support to navigate these difficult times.