3 Strategies to Support PE Growth & Valuation During Market Volatility

At the start of 2022, Boards advised CEOs to take an aggressive approach to growth in all forms: top line revenue, margin expansion, and market share. As the year has unfolded, variables ranging from the war in eastern Europe, divisive mid-term elections in the U.S., inflation, and rising interest rates have created a drag on profitability. Now, the prevailing message is that CEOs must prepare for a potential recessionary slowdown, preserve cash, pull back on anticipated investments, and reduce growth expectations.

As growth, valuation expectations, and exit timing are reset, the conversations business leaders are having with their Boards are shifting from balancing growth goals and market share expansion to capital efficiency and maintaining robust EBITDA margins.

So how are CEOs successfully responding and managing through these mixed sentiments? We were eager to find out and turned to trusted PE investors and CEOs of growth-stage technology companies to get a clear perspective on how they are navigating this challenging market climate. Here are the insights we gained, which centered around one common theme: maintaining focus.  

Focus on Staying the Course

The market and media are awash with competing messages about PE priorities and imperatives. While a sense of urgency or even alarm underscores most of this buzz, CEOs need to maintain their discipline and long-term vision. Executives who can ignore distractions in this market and avoid knee-jerk decisions will be better equipped to scale their acquisitions and cultivate healthy growth rates. 

Jagath Wanninayake, Co-Founder, Chairman & CEO of Suvoda LLC, emphasized, “We have an ingrained bias towards growth, but in a responsible and pragmatic manner. We can never get away from the growth aspect when it comes to valuation, but not at the expense of catering to the latest trend.” From this perspective, now is not the time to chase shiny objects or join the latest bandwagon.

Another potential pitfall during times of turmoil is for CEOs to exclusively play defense, delaying acquisitions or sales. However, the strongest PE leaders maintain an offensive position through volatile markets. In fact, the current market provides an opportunity to obtain promising companies at lower valuations. This gives PE firms an opportunity to acquire portfolio companies that already have a relatively clear go-to-market strategy and higher potential rate of return without as much of an initial investment.

Even selling portfolio companies sometimes takes courage and confidence in these turbulent times. Bob O’Connor, CEO of Loftware, remarked, “Leadership teams or investors might be spooked under the current environment, so they might say, it’s not the best time to buy or sell. But the truth is it is a time to buy and sell. So, let’s consider doing something or explore our options. Settle down, confront the new reality, and take the action that will make your business stronger in the long-term from a positioning perspective.”

Even as some companies in the tech industry experience dwindling growth, their valuation doesn’t need to plummet simultaneously. The outlook for individual enterprises can be optimistic with the proper foresight and management. Bob O’Connor continued, “If you are an established company with good growth rates and healthy EBITDA, you are really well positioned to continue to have strong valuations.”

Jagath Wanninayake reinforced the importance of standing firm in the market when asked about how CEOs can keep people motivated and engaged:

“Companies that focus on fundamentals and building a competitive moat will endure. You should think strategically about capital allocation and how you manage growth. Companies that play to the latest trend will struggle when that trend turns in the market. If companies have excess capacity and high burn rates, action will be needed to turnaround and stabilize the business. At the end of the day, none of it is permanent. Manage through it all and don’t lose focus.”

Focus on Employee Engagement at All Levels

In just a few years, the workforce has undergone drastic changes in their motivation and behavior, making it difficult for executives and enterprises to stay apace. As a result, there is increased risk for personnel at every level to feel disconnected and become more willing to embrace the “Great Resignation.” For PE firms to stay in growth stage, leaders need to deeply engage talented professionals by using acquisition and retention strategies that align with employees’ goals and desires.

Let’s start with hybrid and remote work. The pandemic popularized flexible work options and now 65% of employed people would choose to work completely remote, according to a McKinsey survey. While many workers have adjusted to maintain productivity and meet deliverables, the bonds of connection and the roots of company culture for varied organizations have eroded without proper guidance. Though most learned to manage operations, PE leaders are challenged to create a virtual culture where cohesion and collaboration thrive.

Adapting to remote or hybrid operations is only a partial fix. Pay, bonuses, and equity are still primary motivators for private equity professionals. That is part of a larger trend in the market. Earlier this year, Pew Research Center found one of the major reasons employees left a job in 2021 was because their compensation was too low. Part of the reason has to do with rising inflation, which not only increases the cost of capital and borrowing for leveraged buyouts, but makes it difficult for employees to cover the cost of living (64% of America workers struggled with their expenses in 2022). PE professionals are also concerned about their equity with temporary 409a devaluations and are likely to leave if they feel they’ve identified a safer employment prospect.

For many professionals, the pandemic provided time for introspection where they could reevaluate what’s important in their lives. Yet front-line employees haven’t been the only ones to examine what they want. A survey conducted by Deloitte and Workplace Intelligence estimates 70% of the C-Suite have thought about leaving their current positions in favor of one that better aligns with their overall well-being.

From the top to the bottom of the pyramid, CEOs and Boards have a chance to rethink how they engage, compensate, and motivate their people. Executives should be advocating for competitive compensation and communicating to employees how leadership intends to boost profit margins in the long-term and counteract market fluctuation. It’s critical for leaders today to be very intentional about how they are engaging their teams and driving greater connectivity. Whether it’s through initiatives to drive a greater sense of work-life balance, wellness programs, career mentorship, or simple community and team-building events, leaders that are focused on employee engagement are better positioned to retain and attract experienced professionals, and ultimately fuel additional growth.

Focus on Opportunities for Optimization

Volatile times can force organizations to get laser focused on their core strategy from an investment standpoint. When markets are hot and valuations are sky high, some PE firms neglect their focus on operational efficiencies, cost control, streamlined internal processes, and other chances to refine their businesses. Recessions can effectively justify the need to recalibrate their talent, technology, and business strategy by eliminating waste that is restraining EBITDA growth.

Companies in growth mode are often voracious about private equity talent acquisition. They rapidly create new roles without adherence to onboarding and training best practices. We see this reflected in the EY Global Private Equity survey where 77% of firms with assets over $15 billion say hiring and onboarding are among their top three talent management priorities. With industry support, there’s a chance to evaluate who has been hired and how they can be better trained, developed, and utilized.

Another potential outcome of a robust growth-mode is the unchecked development of technology stacks. PE companies are quick to acquire a diverse array of platforms and tools when the capital and market conditions permit, but significant inefficiencies and inflated costs can arise without proper oversight. As the market contracts, there’s an opportunity for CEOs to work with other leadership to strategically assess tech investments, find redundancies and pinpoint savings without cutting functionality.

Bringing All Three Together

Staying solvent during tumultuous times requires CEOs to strike the right balance between these three focuses. The ability to confidently acquire new business and sell portfolio companies for a healthy valuation requires a fully engaged workforce in addition to assets, processes, and technologies that are regularly being refined. Putting all that weight on a CEO’s shoulders can be onerous, but with the support of the Board and a team of strong C-Suite leaders, private equity firms can remain profitable through turbulence to generate yields for their investors.

To stay up-to-date on trends shaping the private equity executive talent landscape, subscribe to our blog for additional insights.