This article originally appeared in Crain’s Chicago Business on August 21, 2023.
Unconventional Strategies for Uncertain Markets – a Private Equity Perspective
By Duane Jackson & Nick Brand
Just months ago, a recession seemed certain, a banking crisis was unfolding, and the investing landscape was dour. In the struggle between exuberance and despair, however, tables turn quickly. Despite the market recovery, there are reasons for ongoing concern: a potential commercial real estate reckoning; the risk of more Fed action to combat inflation; and a geopolitical landscape fraught with flashpoints.
While no one knows what the future holds, but there are ways to leverage uncertainty and downturns to create value within our portfolio companies—some unconventional. So what lessons can you take and apply to your business? Here are three:
1. Hire, don’t fire: Put your employees first, even ahead of customers, and use downturns to acquire talent as others reduce their workforce. Conventional wisdom suggests you should reduce staff in down cycles. While there may be trimming of underperformers, something you should do in any market, down markets are the time to focus on your people. Don’t destroy the business through overly aggressive cost cuts, which will hamstring your ability to capitalize upon a recovery. Cost-cutting (in a vacuum) is not an operational best practice, and only after your people know their jobs are secure, will they focus on your customers.
In January, as big tech and finance firms slashed staff, Bloomberg went on a hiring spree—leveraging its advantage as a private company with a fortress balance sheet to make long-term investments in talent. It’s a familiar playbook Bloomberg has deployed before.
2. Catch a falling knife: Pursue opportunistic acquisitions of complementary companies while valuations are favorable. Conventional wisdom may lead you to suspend acquisitions during a crisis, either lacking capital or confidence. This is the wrong approach.
In 2019, we invested in a family-owned logistics company. In a cruel twist of fate, a few short months later, the pandemic froze the global supply chain. It would have been easy to be paralyzed by fear, but turmoil presented the opportunity to acquire a complementary business at a meaningful discount to our initial investment. When the economy roared back, the acquisition proved highly accretive far sooner than expected. There was calculated risk, but the upside potential outweighed the downside and, critically, our partner company had the balance sheet capacity to move quickly.
3. Prune Customers: Use downturns as opportunities to fire unprofitable customers, even if they are the largest. Conventional wisdom suggests that in a downturn, you should focus on customer retention. Instead, refocus those resources—not the least of which is your time—on more profitable customers or investments that will help improve cash flow.
You can’t control when a pandemic will end or the Fed will stop tightening, but you can control how you allocate the finite resources available to you (time, capacity, free cash flow). Whether you free up and redeploy productive resources to acquisitions, higher growth product lines, or even outside your business into other investments, identify and embrace the factors within your control to unlock your full potential.
So take care of your people and invest during tough times, keep your balance sheet strong so you can seize opportunities, and fire folks who aren’t adding value (even if they happen to be your largest customer).
