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Action Matters

Enhancing the Value of Portfolio Companies

As private equity firms seek to navigate the changing investment landscape in the wake of persistently challenging economic conditions, Action Matters sat down with senior members of Alvarez & Marsal's Private Equity Performance Improvement Practice to discuss emerging trends in the buyout world - from both sides of the pond.

Joining the discussion: National Practice Leaders Nick Alvarez and Jeff Feinberg from New York and Managing Director Malcolm McKenzie from London.

Action Matters: The global financial crisis clearly had a dramatic impact on the private equity world. What changes did firms make or are they making now that many say they can see the light at the end of the tunnel?

Mr. McKenzie: One of the biggest shifts we're seeing is private equity firms paying much more attention to the operational aspects of their portfolio companies. They're closely evaluating management and becoming much more involved in running the companies. They're also actively looking for opportunities to make operational improvements.

AM: What are the smartest PE firms doing right?

Mr. Feinberg: We're seeing much more focus on the C-level teams of portfolio companies. Firms are really vetting the CEO and CFO to make sure they are the right people for the job. If doubts arise about current management, firms are more open than ever before to bringing in outside advisers or interim managers to do the heavy lifting of the acquisition or integration and then help to bring in the right permanent management. PE firms can no longer afford to take a chance on managers.

Mr. Alvarez: In addition to management, savvy firms are also very carefully monitoring their portfolio companies regularly from a cash, revenue and expense perspective. GAAP results, while important, are not quite the focus as much as before. Private equity firms with operating groups within them are quickly deploying those resources to take a more active role - viewing the process almost as you would view a restructuring situation - and those that don't are bringing in outside help.

AM: On the subject of interim management, it sounds like private equity firms seem to be more open to this strategy than in the past. Is that your sense? Are you seeing any differences between the U.S. and the U.K.?

Mr. Alvarez: Generally speaking, it seems like private equity firms are much more likely to tap outside resources than in the past, but the degree of involvement varies. Once firms sense that there is a need, more are acting faster to bring people in. Most interim management cases, however, occur when the company is on the brink of a liquidity crisis - when the situation has deteriorated well past the point of a need for performance improvement and the bar is much higher.

Mr. McKenzie: In London, we are hearing from private equity firms that three years ago likely would not be inclined to engage outside advisors. Today they are very interested in discussing what A&M is doing in this space and how we may be able to help. There is definitely a much greater willingness and openness by many firms to intervene in their portfolio companies and improve their performance.

AM: What are the most common types of problems you're solving for clients - why are they hiring A&M?

Mr. Feinberg: One of the major trends in the U.S. is that private equity firms are seeking more operationally-oriented CFOs. This has increased demand for A&M professionals who have operational backgrounds and can serve that role in an interim basis - implementing processes and procedures and managing key liquidity levers - and who are accustomed to working with a sense of urgency and comfortable with rapid-fire, on-the-ground decision making.

Mr. McKenzie: There's also been an increase in organizations in both the U.S. and the U.K. calling on A&M to assist them with carve out situations. As a result of the downturn, companies are trying to get out of non-core businesses and acquirers are looking for opportunities to pick up these assets at distressed prices. We've been working with both buyers and sellers on all aspects of the process.

AM: It sounds like A&M is in a position to serve private equity firms across the entire investment lifecycle. What accounts for this unique position?

Mr. Feinberg: We have a deep bench of proven, senior professionals with extensive private equity and various industry expertise. We can also leverage our 1,700 professionals worldwide in order to significantly reduce the learning curve in any organization and provide an expert in just about any field.

Mr. McKenzie: While we might not start out with interim managers in an engagement, the ability for us to put in a CFO, head of sales, CIO or otherwise, is attractive and distinctive. Private equity firms recognize that this ability focuses on getting results quickly rather than providing endless analyses and reports.

Mr. Alvarez: As private equity firms continue to focus aggressively on enhancing the operational performance of their portfolio companies, we are seeing mounting demand for A&M's hands-on operating experience and know-how. Equally important as ensuring the right managers are at the helm is making sure that you're partnering with the right advisers - people who have the skill set and hands-on experience to execute in this environment, produce bottom-line results and enhance long-term enterprise value.