Preparation of a private equity portfolio for 2023


Preparation of a private equity portfolio for 2023

The confluence of external factors and challenging performance prospects are forcing private equity firms to scrutinize their portfolio companies’ prospects and reconsider their portfolio strategies. For private equity firms, this requires leadership teams to focus on prioritizing operating margin overgrowth and pushing teams to engage in scenario planning.

Additionally, portfolio talent must be assessed to ensure leadership teams have the skills, agility, and ownership to meet expected challenges. More than ever, PE leaders need to hold their organizations accountable.

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Q4 2022 hedge fund letters, conferences and more

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A new playbook for private equity firms

In order for operating companies to successfully emerge from the recession in a leadership position, companies must rapidly develop a new concept for countermeasures. After a period of growth, the new playbook needs to shift the organizational focus back to operationalization, often through complementary acquisitions.

This change can be most effectively accomplished through the use of an agile, small-footprint team that supports local leadership to prioritize and achieve high-value operational opportunities.

The team should be comfortable using data to identify opportunities and prioritize and quantify the impact of change. The team should be able to look around corners and spot opportunities and threats that the leadership team running day-to-day operations might not otherwise see.

From the inside it can often be difficult to see what is happening. For example, we worked with a chemical company that had a sales team with discretionary pricing and a limited incentive structure to reward high-margin deals.

Consequently, the application of pricing rules and the incorporation of market data resulted in a $20M improvement in annual EBITDA (~10% of revenue). In such cases, an outside perspective can prove particularly valuable.

To make matters worse, today’s and tomorrow’s environment is very different from yesterday’s, and most executive teams have never encountered these market conditions. Leadership teams have been built to optimize growth through acquisition and integration.

The period between the end of the financial crisis in late 2009 and the onset of the COVID-19 pandemic in 2020 marked the end of a 10+ year bull market. In contrast, the average tenure of a CEO is 7 years.

This represents an experience gap that is amplified by teams that either have operational experience that hasn’t been leveraged, or that place less emphasis on hiring operational functions. Current market conditions can create opportunities to upgrade teams, enhance operational leadership and attract talent previously considered unavailable.

Given the uncertainty of what the future holds, it’s difficult to gauge what the next risk is.

The foreseeable future is likely to be one of high volatility with more risk and turbulence than sustained growth. Teams must be able to drive agile change around hairpin bends. Businesses need to address risks in parallel and should create at least two plans to manage market uncertainty, one that anticipates a significant drop in volume and another that anticipates flat to rising demand.

Plans should be agile, with regularly scheduled reviews and updates to respond to a dynamic macro environment. With less wiggle room in the system, now more than ever, teams need agility to deal with adversity. A zero-based budgeting approach is often useful to identify strategies to respond to evolving market realities with pre-identified cost reduction strategies aligned to target thresholds.

A second scenario should also be modeled, reflecting flat to rising demand and identifying key OpEx opportunities to create growth capacity. This second scenario provides transparency and ensures alignment with the growth vision, allowing the company to react quickly to potential improvements in the market.

It should be noted that companies still operating with solid balance sheets may have a unique opportunity to steal market share by acquiring and investing in companies that are well positioned to rebound quickly once the economy picks up improved.

These companies should consider investing ahead of time to gain organic market share (offensive attack) and scale to be more cost effective.


2023 will bring significant challenges, but opportunities exist for portfolio companies that are taking the steps necessary to weather the storm and prepare for growth down the side. Countermeasures will not suffice as they are very likely to underestimate or overestimate what is necessary and required.

These macro factors are new to most operators, so private equity owners should be ready to take more responsibility and work with consultancies to identify opportunities that require bold action amid global headwinds.

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