Operating Partners and their Value During a Recession

It's no secret that your typical private equity firm will have a different strategy compared to that of distressed investors. When recessions come and portfolio companies start to feel the heat, many PE firms would prefer exiting instead of catching a falling knife, especially as the other owners on the cap table will look to place blame and look for solutions from the majority owners, aka the private equity firm. As banks will look to the private equity firm and determine what the best course of action is when the leverage remains, they must rely on crafty financial engineering as one method (although outdated as of late), the other is having a distressed expert come in and bring the portfolio company back to its former glory.

Often at the portfolio level, an operating partner will divvy up their time across a few key portfolio companies to drive true change and value creation and not be spread too thin. When the market turns, more attention must be paid to any one particular PortCo, ideally, the one failing the quickest. Daily duties in these situations will have a larger and more serious impact, including job cuts, operational tightening, removing slow markets or underperforming products, etc.

Yet, with all the work that could be done to take a failing company and turn it into an ‘ok’ company, sometimes firms are better off cutting the cord, letting a red mark appear on their fund investment list, and focusing their attention on the companies that have stronger inelastic elements.

Operators at this stage need to have strong care in how they are delegating their own time, as any company where a distressed team must come in will not be a 40% IRR type investment. Focusing on the current management teams of the company, cutting the operational inefficiencies (i.e. costs, exploratory sides of the business), and dialing cash flow and survival are where the energy should be channeled. When a recession for the whole market or only a singular industry is happening in real-time, time is a commodity that must be raced against, and there is no time for shaking hands and kissing babies.

Yet, if you are an operator who happens to specialize in distressed situations, there will be ample opportunities in the coming two years and you will be able to name your price at virtually any private equity firm, as the role has been so sparsely needed for the previous fifteen years, it seems many have forgotten how it even works or pivoted into alternative industries. If you’re considering the move and think you have the chops for thriving in such an intense, high-speed environment, reach out to us and we can provide introductions to some of the best lower and middle-market investors throughout North America.

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