BrainWorks Leadership Discusses the Full Impact of 2020
In this article BrainWorks explains how the private equity recruiting market has been impacted since the beginning of 2020, including expertise on many different topics in PE including the importance of the CFO role, especially during times of disruption and the emergence of portfolio operations and transformation groups.
2020 brought a degree of challenge to Private Equity that surpasses industry events that have confronted the very best fund and portfolio operators over the last several decades. The spreads between winning and losing decisions have increased dramatically and the variance across verticals and industries are both volatile and more difficult to predict than before.
The battle for capital against a backdrop of unprecedented levels of new liquidity, ﬁscal policy, geopolitical headwinds, and global health risks has created a paradox of the need for greater returns on capital in a context where the certainty of those returns is increasingly difficult to predict. Inexpensive debt exacerbates the edges of this polarity, increasing the temptation to consider leverage to push multiples and yields towards and perhaps even beyond historically typical risk tolerances. The conﬂuence of these phenomena requires a level of courageous decision-making and portfolio discipline to sustain what have been higher returns in recent years.
Portfolio level and component acquisitions within the portfolio will benefit at this time from discounts on impaired acquisition targets, increased capacity to leverage and increased overall liquidity in the markets. That said, the low cost of debt paired with the uncertainty and unpredictability of returns increases an already challenging polarity for PE ﬁrms. Similarly, private lenders are actively looking for deals in 2H 2020. This is a welcome reversal in several sectors where private debt was shut down or delayed in the ﬁrst half of 2020 working out the impaired portions of their portfolios.
With interest rates approximating zero, it wouldn’t be surprising to see a continued acceleration of activity rolling in to 2021.
Private Equity and Venture Debt Leadership Require Greater Nuance and Precision Than in 2019
The capacity to discern the myriad ways that COVID and its concomitant disruptions are critical and will continue to impact Q4 2020 and extend through to 1Q 2021. In the case of analysts and associates, in several industries and sectors, this may be the ﬁrst time in their careers that tried and true models need to be revised, recalibrated and oriented to the current landscape at the current scale and depth. For portfolio-level leadership, the stakes for making the right call have never been higher. New characteristics will be required including substantive patience, the capacity to impute the impact of paradox and polarity, enhanced risk assessment capacities and a steady hand to keep those assessments in perspective together with a greater capacity to forecast and interpret market signals and activity together with traditional private equity skills.
During Disruption, the Top One or Two Percent of Private Equity Talent Differentiate Themselves Even Further
Polarity and disruption in the economy further accentuate and differentiate expertise in the industry from the high-performing nature that industry lore is made of. It is in these times that the delta on results between ﬁrst and second-tier talent can be measured in deciles rather than a handful of percentage points. Identifying and securing this talent will similarly separate the ﬁeld. During the disruption, some of this top talent will seek alpha by looking for those industry players that are prepared to make the investments necessary to capitalize on the moment. Savvy investors will recognize the rare opportunity to secure top talent that otherwise might be unavailable in the market.
Spotlight – Portfolio Company CFOs
The challenges of 2020 have placed an even greater emphasis on the role of the portfolio CFO compared to that of 2019, which was the highlight of that year. The pandemic requires businesses to have exceptional leaders at the CFO level to navigate the challenges the pandemic has created. It tested whether there have been strong processes in place to allow companies to accurately forecast and have systems and tools that provide critical insights into operations and key value levers. It has been critical that companies can pivot quickly when the data is suggesting that there are potential pitfalls and opportunities.
Expanding CFO Competencies, Skill Characteristics and Scorecards
Top CFO performers score card high on competencies such as decisiveness, resourcefulness and perseverance, together with a more ﬂuid capacity to assess risk, to calculate impacts of events without recent precedent, to refocus and retrain staff, and to communicate ﬁnancial objectives and strategies with new clarity and understanding. Additionally, those executives with a well-rounded tool kit have been paramount in being able to quickly drive transformation initiatives across the business creating sustainable improvement. The CFO is no longer the role of being highly competent in reporting and/or FP&A. Great CFOs are highly adept in operations, IT and have a strong grasp of the commercial side of the business. Some have also had to take over HR. They require the ability to partner closely with other business leaders so that ﬁnance is embedded into every aspect of the business.
Additionally, many businesses have had to reﬁnance over the past two quarters and CFOs that are highly adept with treasury, managing lender relationships and have detailed forecasting processes to make lenders comfortable have been critical. Finally, there has been signiﬁcant movement towards excellence in the integration area. There has been a strong need for CFOs to be able to execute M&A transactions leveraging their developed playbook on integration.
The Impact of Disruption on PortCo CFOs
For the ﬁrst half of the year executive search volume can be described by searches geared towards quickly changing out leaders that were not driving value or persevering through the pandemic. On the candidate side, many executives were caught in limbo and pondering whether they should stay and wait it out as exits were put on indeﬁnite hold or pursue another opportunity where a potential liquidity event was nearer or had more economic upside long term. Several companies may take years to recover from this event or require pivoting their business models such as those in brick-and-mortar retail. However, some sponsors have seen their portfolio do a complete 180 as they were heavy in food and packaging, have strong e-commerce models, and or within verticals associated with cleaning products or hygiene. Industrial services saw a tremendous amount of volume given the fragmentation and the ability to easily scale via M&A. Overall, we have seen good volume in e-commerce, SAAS, industrial services and packaging.
The Return of Deal Flow
The past two months has seen deal ﬂow come back very strong for a number of sponsors as many deals were put on hold once the pandemic started. Bankers and intermediaries were sitting on CIMs ready to go to market. If not for the pandemic, it would have been a record year in terms of successful exits. New deals are starting to emerge as well. Our last 3 engagements have started when sponsors were in exclusivity with a business and wanted key leader(s) in place concurrent with the date of closing for each transaction.
Disruption Drives Greater Off-Cycle Associate Recruiting
Private equity investment team recruiting ﬁnally saw a signiﬁcant slow-down. COVID-19 delayed the Summer 2022 Associate recruiting cycle. Prior to COVID, it had been steadily moving up reaching a height in 2019 starting in the Fall. Many ﬁrms have decided not to recruit this year, and several processes that were in progress had been put on hold over the summer. 2020 and 2021 will see a lot of off-cycle hiring as ﬁrms will go back to the market when deal ﬂow returns. We are already seeing that happen with timing shifts mirroring the return of deal ﬂow and demand for unfulﬁlled capacity returns.
Further Emergence of Portfolio Operations and Transformations Groups
2020 has seen the continued emergence of private equity portfolio operations and transformation groups. Sponsors are continuing on this trend and we are seeing operations teams starting to scale with levels similar to that of investment teams with emphasis on roles at the Principal, Vice President, and Associate levels. Each group tends to have its own niche and preference as to the types of people they prefer typically based on the investment strategy, size and sector focuses. We have been active in recruiting strategy consultants, corporate leadership development groups, and restructuring/turnaround professionals. We see this trend continuing as ﬁrms need a distinctive value creation strategy to win deals, drive top returns, and separate themselves from peers.
The times are both trying and exciting. In over two decades of working both within the industry and in service of its success, I can remember few examples where the value add of differentiated recruiting is so clear. The opportunity to revisit, reanalyze and reﬁne candidate score-carding and success characteristics is exhilarating and seeing my partners at every level of the industry adjust and return again to fantastic success makes each day more compelling.
As all of us work together to make 2021 the most fruitful and rewarding year in the industry yet, I wish all of you and your families strength, health and resilience.