Turn a Lull in European Deal Flow into an Opportunity to Bolster PortCo Operations

The war has stymied private equity deal-flow and the top question on every European operating partner’s mind is when will activity resume? In the meantime, however, operating partners are focusing more attention on managing portco operations in challenging times. Given the rough ride European portfolio companies have experienced over the past few years and months, this often means reconsidering investment theses. Because the underlying assumptions supporting the growth agenda may no longer be valid, operating partners must put new focus on different levers for value creation. 

Based on what we heard at the 2022 European PEI Operating Partners Forum, we believe there are four critical considerations for operating partners to keep top of mind in the second half of 2022:

  1. Mitigating inflationary pressures.
    For us, one of the most eye-opening discoveries of our time in at the conference is that portfolio companies currently pass along only 40% of material price increases to their customers. Furthermore, there is often a lag between when the price increase is received, and when it filters down to the end customer, leading to a significant negative impact on cash flow. To prevent inflationary pressures from deteriorating the bottom line, operating partners must help their portcos unlock operational improvements in productivity, material waste, procurement, and energy. Deeper conversations and explorations around these issues will be necessary to protect margins in both the near and longer-terms.

  2. Increasing supply chain and human capital resiliency.
    While increased operational efficiencies can help offset rising prices, efficiency can no longer be the singular mantra it has been for years. Portfolio companies face a host of other risks, particularly when it comes to supply chain and human capital, which are inextricably linked. Building the redundancy, flexibility, and responsiveness of both areas simultaneously is fundamental, and operating partners need to be identifying specific solutions and action items to that end.

  3. Emphasizing operational due diligence.
    We continue to see a curious disparity between large private equity players and small and mid-sized organizations when it comes to operational due diligence. Smaller PE companies often lack detailed and accurate assessments of portfolio companies, which can compromise the soundness of the value creation plan. At a time when risk is heightened in so many areas, this can be an extremely costly oversight. 

  4. Focusing on long-term sustainability.
    There is no shortage of challenges for European operating partners and their portfolio companies right now. However, operating patterns are finding ways to look beyond the immediate crisis and the effects of the war and to focus on long-term sustainability issues in their investment decisions and value creation efforts. One of the bright spots of the recent forum was the evidence pointing to operating partners’ commitment to emerging ESG topics such as diversity. The partners are clearly interested in doing the right thing for the business in which they invest, and not just within the context of the three-to-five year buy/sell cycle. 

Operating partners must keep the conversation going

The operating partner community launched some critical conversations at the forum. However, the next few months will be imperative for companies to build on the insights gleaned and turn the ideas into action. Operating partners that embrace the opportunity to build resiliency, cost-efficiency, risk assessment, and ESG capabilities now will be better positioned to navigate the current challenges as well as to capture both top and bottom-line value creation opportunities when deal flow resumes. 

A special thank you to Andre Sousa-Cruz for his contribution to our key take aways.