Private Money in Your Future – Part 3 (Life After Landing)
Private Equity (PE) and Venture Capital (VC) are not immune to macroeconomics. Fundraising has indeed declined in 2022, however, PE & VC are incredibly resilient.
“Higher rates have finally breached the engine room of the PE dealmaking machine—the leveraged buyout,” writes Tim Clarke at PitchBook in their October 22, 2022 newsletter. The source goes on to cite indicators pointing to a decline in leveraged buyout activity before highlighting how the industry is repositioning.
First, “PE is doing more public-to-private deals. Take-privates are on track for a second consecutive year at $100 billion or more in deal value […and] they also allow mega PE funds to deploy their mega amounts of dry powder at beaten-up public prices.”
“Second, PE is finding a new source of funding in private debt funds. Four of the last big take-private deals announced in Q3 used private debt.”
“Lastly, PE firms continue to drive strong top-line growth in portfolio companies. In its Q3 results, EQT estimated that its PE portfolio was still growing revenue at 20% through August. Blackstone indicated 17% revenue growth for its PE companies in Q3.”
“Growth like that goes a long way toward covering higher interest expense.” [See source.]
These strong vital signs of the underlying investments are indeed encouraging. As we have long maintained, from an executive employment point of view, it is the portfolio company level that interests us, in part because of our clients’ positive experience in the sector. So let’s examine a few of our clients who have landed at portfolio or PE-related companies in the past year. Note, these executives generally wish to remain anonymous, and we will therefore respect their wishes.
Our client joined “N-Co.” in August 2022 after a rigorous vetting process that began with gateway interviews, followed on to senior interviews, involved a presentation of a simulated business case to a board of executives, and concluded with an investment thesis presentation outlining how our client would pursue the task at N-Co. if given the opportunity.
N-Co. describes itself as being a group of related family offices that offers an ownership through entrepreneurship program. Apparently our client’s thesis was well received because they hired him as a result. Here’s how he describes his new role: “I launched a fund with N-Co. to invest in and operate a profitable Food & Beverage Manufacturing businesses or Quick Service Restaurant business. We are looking to acquire a majority stake and actively operate the business.”
Our client had experience as an entrepreneur and says he particularly appreciates the support he receives from N-Co.’s service centers on financial management and administration so that he can really concentrate on the “fun” entrepreneurial task of locating suitable acquisition targets. Once he finds one, he will be the new CEO and be fully and operationally involved.
“I am surprised at how the pandemic has affected some locations and industry segments so severely while leaving others completely untouched or even prospering,” he says, citing businesses that served lunch to office workers in downtown locations as one population particularly hard hit by remote working, while others with a significant takeout or delivery business as either actually benefiting or at least maintaining a neutral performance in the face of Covid-19 effects. It is not his objective to acquire distressed businesses, though, but instead to locate actively growing businesses that need more capital, better scale, or other benefits that he and N-Co. can supply.
Reflecting on the larger picture of PE-related businesses, our client interprets the landscape as being one of opportunity regardless of where we are in the economic cycle, in part because so much money has flowed into PE-related businesses’ coffers, so that fund managers are increasingly looking at smaller businesses to invest in, acquire, or otherwise participate in.
In his experience, fund owners will typically get involved in the hiring of the C-level in their portfolio companies, but leave much of the remaining hiring decisions to the operational management—something our client is looking forward to as soon as he completes his acquisition.
Here are a few selected examples:
Our clients are often surprised at the robust activity in what we call the “unpublished market” regardless of the economic cycle. To us this continuous churn is only natural as companies adapt to their competitive environments, change strategies, and adjust internal requirements.
“[…] the traditional ‘slash-and-burn’ CEO is no longer the best fit. Today, we are looking for CEOs with go-to-market, marketing and commercial experience, CEOs who are flexible and creative, future-ready leaders who are agile, and CEOs with a proven track record. We are looking for proven and dynamic profit and loss managers who understand the cost base of a business and who can optimise resources to reflect both diminishing demand and the challenged margin and operating base of these businesses.” [Amanda Worthington, Heidrick & Struggles, See source.]
This is exactly what happens in the executive market when macroeconomic changes roil the business environment: companies need to change direction and they often need new leadership talent with specific experience and/or skill sets. Of course, we see this phenomenon first in the unpublished market (where about 75% of our clients land)—before any of these new requirements have bubbled up to the more visible recruiter and published markets.
“The good news is that inflation-recession cycles can be relatively short-lived. And the long-term outlook for private equity remains as strong as ever. Limited partners (LPs) have consistently signaled their intent to maintain or increase PE allocations. They remain confident in the fact that PE returns outpace other asset classes. With $3.6 trillion in dry powder generating fees, general partners (GPs) are well positioned to ride out a downturn and prepare for the recovery […]. And that can spell opportunity: Deals done coming out of recessions tend to deliver strong returns, something both GPs and LPs learned in the wake of the global financial crisis.”
“[…] it will be important to help future-proof the business by focusing on key initiatives such as environmental, social, and corporate governance.”
The authors go on to give this advice: “[…] manage proactively to anticipate change and get ahead of it. That will be critical in weathering this period of turbulence and taking full advantage of the recovery to come.” [See source.]
If it sounds as if a certain amount of moral courage may be required to execute a strategy such as Bain suggests, then, please take heart from one of our clients who did exactly that and is proud and pleased to tell his story after landing as Director of External Communications for a PE portfolio company.
“I took a deep breath because of the pandemic and started job searching. I was pretty aggressive, but the story of my job hunt is that I always came up in second place,” said Paul.
Paul felt that he was doing all the right things. He sent out dozens of resumes to large companies where he had close contacts. He estimates that 75% of his introductions were networked, and he found it easy to get in the door and line up interviews. But his efforts weren’t yielding job offers.
“I eventually got some feedback from a recruiter that made me realize that I needed help in my job search. He said, ‘Paul, you are clearly the person who would take the company brand and communications to another level, but your approach would probably be too innovative for the average marketing team. Most companies are designing the next fly swatter, and you’re talking about mosquito lasers.’ I felt helpless,” said Paul.
“I wanted an expert’s perspective on the situation. I knew I was missing something, and I was ready to do the work to figure out my problem,” said Paul.
The Barrett Group’s Clarity Program© was eye-opening for Paul. Working with his coach, Lisa Levesque, he began for the first time in his career probing the question of where he would fit best.
“I’ve had coaches before, but they’ve always tried to change me to conform to the picture of what employers want. Lisa, however, encouraged me to embrace the distinctions in my career and to feel free, frankly, to show them off.”
“The value of the TBG program outweighed the cost in the first three days! Through Clarity, I recognized that I want a job in which I can have higher altitude conversations about vision, depth, architecting, and ‘What is the 5- and 7-year outlook for this company?’. That goal, alone, eliminated half of the positions that I applied for,” said Paul.
“When the recruiter asked me to explain why I’d been unemployed for so long, a streak of boldness came out of me, thanks to TBG. I told her, ‘Everyone is looking for a normal, status quo, person. That’s not me. I’m the one who will take the brand to the next level. If your company launches rockets with your satellites on them and they crash, can your other candidates handle that? If you are looking for a truly innovative communicator, I am the guy you want.’ It’s because of Clarity that I could say that,” said Paul.
When the initial offer came in much lower than Paul had hoped, Jerry [his TBG Career Consultant] helped Paul outline how to negotiate a compensation that better reflected the value that Paul felt he brought to the table. The final offer was more than 30% higher than the original.
“I really wish I had known about The Barrett Group in week 1 of my job search. If I ever transition again, Barrett will be a part of that transition. Period!” [Read More: Paul Cabellon]
When you are ready to make a transition, contact The Barrett Group. “It’s our job to help you find yours!”
Peter Irish, CEO
The Barrett Group