The following article is a recap of a November 1st, 2023 panel at LPGP CFO/COO Private Equity New York titled: The CFO and COO's Support of Portfolio Firm. Concertiv CEO Priya Iyer was the moderator and was joined by three private equity CFOs.
Key takeaways and discussion topics:
#1: Navigating Economic Challenges and Emphasizing Operational Efficiency: In 2023, CFOs and COOs, particularly in mid-market and private equity sectors, are dealing with a range of issues such as economic uncertainty, regulatory changes, and cybersecurity threats. With the rising cost of capital, there's a heightened focus on careful expenditure and operational leverage. Adopting a bottom-up approach to budgeting and expense management is crucial, requiring an in-depth understanding of the needs across different departments.
#2: Strategic Partnerships and Communication with Portfolio Companies: CFOs play a vital role in partnering with portfolio companies, especially in managing budgets and offering expertise in areas like tax and procurement. Establishing a transparent and open line of communication is essential, helping these companies focus on both top-line growth and efficient expense management. It's also important for CFOs to be viewed as partners rather than overseers, aligning with the goals and challenges of portfolio companies to facilitate their success.
#3: Spend Management and Proactive Problem Solving: There's a significant focus on managing key spending areas like payroll, real estate, travel, insurance, and technology. CFOs are encouraged to adopt a collaborative and non-threatening approach in this process, prioritizing clear communication and understanding the unique dynamics of each portfolio company. Additionally, identifying problems early, investing in the right people, and aligning KPIs with business objectives are vital in ensuring the efficiency and effectiveness of these firms.
#4: Flexibility in Exit Strategies and Continuous Market Engagement: Given the challenging environment for exits, CFOs need to be creative and flexible in their exit strategies, including considering partial exits or GP-led continuations. Despite the current market difficulties, it's crucial to remain engaged with potential buyers and market trends to identify opportunities for capital redeployment. This approach involves continuous market engagement, strategic decision-making on holding or selling assets, and supporting portfolio companies in preparing for future exit opportunities.
In 2023, CFOs and COOs are finding themselves grappling with a whole group of issues, starting from economic uncertainty and the looming recession to even more regulations from the SEC, talent shortages, cybersecurity concerns, to name a few. Mid-market Private Equity, and Private Debt firms are dealing with a lot of challenges and not enough resources to get it all done. This is a consistent theme and a persistent challenge with CFOs.
Talking Point: Can you kick us off by talking about how we think about the management company and how can a CFO have real impact at the management company level?
- One of the biggest things that we do is a bottom-up approach when it comes to budgeting, understanding everybody's needs, whether it's Investor Relations, Sales Investment team, etc., and just being the hub to understand everyone's needs. When it comes to expense management, it's a quantitative exercise that can be difficult to get an understanding of the true value that's coming out.
- It is not simple going out to market and doing an RFP to figure out whether you're getting the lowest price out there, but how much additional services, additional ways that you can partner with your service providers to find ways to benefit different sides of the business. We spend a lot of time there looking at it on a vendor-by-vendor relationship model versus an expense line.
- Finding ways to be at the table there, listen, suggest, take some of these responsibilities on and to run with them starts with getting in front of them. They're all completely different. They all have their own needs.
Talking Point: How can CFOs bring all of that past experience and help portfolio companies? How are you helping them manage their budgets in 2023 and create budgets for 2024? What's that process?
- It's mission critical that the executives of the portcos are focused on the businesses that they're working on the top line then expense management. We try to be transparent and have a real open line of communication so they can see us as a partner.
- Focus on what's core and critical and let us help the portco on some of the additional items. Indirect expenses are extremely important, but it's not necessarily the most important thing for the executives that are there.
- We will mobilize teams to come in and assist with budgeting, assist with operational streamlining, assist with putting in place procurement programs to institutionalize it. We are working with the companies day in and day out and building relationships with the people on the ground.
- In terms of focusing on costs, the most important thing to put in place is reporting programs that are focused on the key drivers of the business so that we can identify issues early and areas of growth.
Talking Point: There is a big focus on spend management across the board this year. How do you deal with this topic of spend management?
A very basic way to look at it is where is your biggest spend and based on statistics, for mid-market PE firms, payroll and real estate can be first and second in terms of spend areas but after these two, the four biggest spend areas are travel, insurance and employee benefits, market data, and technology vendors.
In 2023, travel costs have gone up 48% in the last 12 months ending September 2023. 48% increase in travel prices and the GBTA projects another 8.6% increase in travel rates in Q4 of 2023.
Talking Point: How are you helping portfolio companies, how can everybody really improve in these areas? Any examples you might have about using certain vendors, etc? What are some ways in which we can approach this?
- Being very transparent, starting with incentive alignment, what we're trying to accomplish, and then making sure that it's collaborative. If there is an expert coming in to help look at these issues, make sure that their main point of contact isn't an operating partner or someone on the management company side, but that it is the CFO or someone under the CFO at the portfolio company.
- Making sure that there's an open dialogue about what kind of time commitment this is going to be, trying to minimize that and making sure that it's time well spent. Reviewing the spend diagram, seeing what are the items of most interest in, making sure you focus on those things.
- Learn their business, learn what they've done, understand why they've done it versus just how we've always done it. When you're in the trenches, you're going to battle together and form that bonding relationship.
Talking Point: This year specifically, portfolio companies in that state of “the trenches” - what can we do? What are some tactics? What are some great ways in which we can have impact?
- The earlier that you can identify a problem or a potential problem, the more options you have available to deal with those.
- Accessing information is very important in these situations, and we like to make sure that we are represented on the board of the portfolio companies so that we have access to information in real time, and have influence in the discussions at the board level.
- Invest in the right people, have the right people on the board, people that are capable of dealing with difficult situations and capable of making tough decisions. Then aligning KPIs to deal with those issues. Incentivize your management teams to work out issues and align their incentives to things that are going to help turn around the business.
- Preserving cash as much as you can, trying to stretch out your credit terms and payment terms, trying to collect in and reduce your database as much as you can so you can preserve cash when you're looking at debt.
- Working with the portfolio companies to align their debt maturities and looking at shorter debt maturities in the current environment so that when the market does turn back and the capital market's correct, they can take advantage of the reduced interest costs.
Talking Point: What are ways that you need to be flexible and a recommended advisor to help push things along?
Sometimes it requires creativity where it may not be a full exit, partial exit, or a GP led continuation, and you have to be at the table to help throw out some of these thoughts, ideas and help figure out what will work, and what will not work.
Talking Point: Maybe you thought 2023 would be the exit for your portfolio, it's not a great year, and you look at it and you find that, oh gosh, now to get another three, five years and to do foundational work, build it back up to show the continuous growth, how do you deal with all of that?
- It's an interesting environment at the moment. You have this tension of poor capital markets and then IRR drag, so it's not the best time to sell, but holding on for 2, 3, 4 years for the markets to improve is going to drag on your IRR. Firms need to think about what that means from an investor perspective, but also at the management company level as well.
- It's the businesses that sit in low revenue growth, low return on capital, that you have to make tough decisions because holding onto them for another couple of years isn't necessarily going to achieve a better outcome.
- Sometimes you will need to make the call and sell something earlier than you would've liked, but you might be able to redeploy that capital into something else and that is the higher growth potential.
Talking Point: Handing it over to the panelists, list one or two takeaways for our audience in terms of what they could immediately do to support their portfolio companies.
I think to the extent that you are active on the board of directors' side for the portfolio companies, really taking a look there. We included bankers earlier in the life of the fund. Sometimes you can incorporate them every once in a while, such as into a board meeting to do a presentation. They love being close to your businesses. With alignment, Banks can share what the exit might look like, and that's also a space for cyber ESG, IT insurance.
Talking Point: How are you leveraging the board of directors meeting to keep these larger issues at top of mind?
- By continuing to be creative and finding different ways to solve problems. We started doing executive retreats just to get out of the office, think about things in a different way. We also invited people outside of the firm to join. This helped form new thoughts because we all have our internal biases on how we want to solve a problem. It is important to keep thinking about adding value, not necessarily just the expense side of the income statement.
- It is important to be a true partner with your portfolio companies. Be flexible during challenging times, and hold their hand along the way while giving them the tools to succeed.
- Invest in the right people and make sure you have the right management teams in place and incentivize them to grow the business and affect the business thesis that you have.
Thank you. I will end with three tips for the audience about spend management.
- If you haven't looked at your travel policy in 2023, it's probably time to revise. Your travel policy is probably outdated given COVID, and travel has completely changed since then. If done with strong peer benchmarking, you're going to improve employee satisfaction and save money for your firm.
- There was an EY Survey statistic that was recently published which said 10% of all SaaS spend is completely unused. Concertiv statistics show that you can save 3% on average on invoices that you're paying due to people making mistakes.
- The maximum number of insurance renewals are being done in Q4. If you are looking at your cyber insurance policy, the market trend is that you can achieve almost a 10% reduction in your cyber premiums just because of all of the improvements that have been done in the last two years. If you are not getting at least a 5% drop in your cyber insurance, you're not getting what you should.
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