Six lessons operating partners have learned from 18 months of disruption

Notes from a pandemic: How management teams and operating partners have learned to cope with covid.

Two years ago, no one could have imagined that operating partners would be scrambling to help portfolio companies source face masks for factory workers or buy hundreds of laptops so that call centre workers could work from home.

The pandemic has led to a strange, and at times difficult, 18 months for operating partners. Value-creation plans have had to change to deal with the harsh realities of keeping businesses running in one of the toughest operating environments we have seen in decades. Management teams have been under immense pressure to keep their staff healthy, adapt their business models and keep profits rolling in.

As we slowly start to emerge from the pandemic, how has this intense period of change affected the way that operating partners do their job? What lessons have they learned that they will take forward when the pandemic is over?

1: Planning is essential

When London-based buyout firm Cinven held its annual three day offsite in the summer of 2019, the firm’s leadership asked the partners to look at how they could prepare their portfolio companies for an economic downturn. The thinking was that after a 10-year bull run and a toppy market, some sort of recession might not be far off.

Thilo Sautter, a partner and head of the portfolio team at Cinven, says that process was “incredibly helpful” when the pandemic hit. “Obviously, none of us saw a pandemic coming, but we saw the risk of economic slowdown. That became very handy when in 2020 the pandemic risks started to emerge,” he says.

It meant that as the pandemic ramped up, the team quickly put in a place a traffic light system to score each of its portfolio companies against critical areas, such as supply chain, employee health, cash and liquidity. That enabled them to “triage” problems quickly. Sautter says the plans themselves were not necessarily executed as they had imagined, but the act of gaming out different scenarios was beneficial.

“Plans end up getting thrown out the window,” he says. “But the whole process of planning and thinking about what might happen is incredibly useful in these kind of very unpredictable events.”

Rob Asplin, senior restructuring adviser at advisory firm PwC, agrees that the pandemic has underlined the importance of scenario planning for operating partners. He says it has shown that it is particularly important to plan for “critical paths”, such as supply chain, logistics and IT, and make sure everyone understands those plans.

“It is not only the existence of such plans in the first place, but as important is keeping them current, widely known and well-understood,” he says.

2: Communicate little and often

The pandemic led to a fundamental shift in the way office workers communicated and worked together with nearly all meetings and work shifting to Zoom and Microsoft Teams. But the early days of covid-19 also required management teams to make lots of urgent decisions quickly, which meant they needed to use a new style of communication to keep things moving.

Gone were the monthly in-person meetings that operating partners traditionally held with their company boards where high-level strategic issues were discussed. In their place were shorter, more regular and more operationally focused calls hosted online. Some operating partners even made the drastic decision to switch from an annual planning cycle to a monthly planning cycle.

Jonas Köhlin, head of full potential at Triton Partners, says: “Management teams started to have more frequent senior team meetings, but also much more operational and shorter calls – a bit like ‘stand-up meetings’ over Teams. It was very pragmatic, very focused, very operational and very speedy.”

He notes that many portfolio companies have kept this new way of communicating because it offers a more agile and quick way of making decisions – useful even outside of a pandemic. “Some of them will continue with that because they realise that it is a great practice that was triggered by the pandemic,” says Köhlin.

3: Use your network and share knowledge

In early 2020, Maurizio Mussi, a managing director at Bain Capital, began hearing from colleagues and portfolio companies on the ground in China telling him to get ready for the pandemic. At the time, many in Europe and the US still believed that covid would be contained in Asia and was not a threat to western countries. It meant a lot of his work in the early days was convincing his management teams “it is coming” and that they needed to take it seriously.

“Human beings are very adaptable but there is an initial moment where there is inertia,” says Mussi. “We immediately thought it was a paradigm shift. While the world was scratching its head, we shifted gear very, very quickly with our management teams.”

He says the pandemic showed how useful it was to have a global portfolio and to share information across the network. For instance, Mussi says that when European chief executives were asking questions like ‘where do we buy masks?’ and ‘what type of masks do we need?’, the Bain team used protocols already developed in Asia to provide European chief executives with a ready-made personal protective equipment plan.

Sautter of Cinven agrees that the pandemic has shown that sharing information across portfolio companies can be invaluable. He says: “We were asking what are the biggest challenges? Where do we see commonality? And how can you make these learnings quickly available in a very informal way?”

Cinven had each of its chief executives share five key lessons early on in the pandemic – many of them were simple things like how to source laptops for home working or do temperature checks at a factory gate. They also circulated the mobile phone numbers of their chief executives to one another, with their permission, so senior managers could pick up the phone and ask for advice directly from other portfolio companies.

4: Strong management teams are critical

Management teams have always been a crucial part of the value-creation plans of private equity firms but under the pressure of the pandemic their role has never been more important.

PwC’s Asplin points out that the past 18 months will have seen an “enormous number of fraught, stressed and difficult situations” between management teams and operating partners.

This will have hit home to operating partners how important it is that management teams have the right skills in place to deal with whatever gets thrown at them. That could be different leadership styles or experience of dealing with recessions. This period has also shown the need for a high level of trust between management teams and the operating partner.

Asplin says: “There will be winners as well as losers, depending on their speed of action, frankly their skills and ability, and a huge element of good or bad luck as well.”

5: Fixed costs don’t have to be fixed

Fixed costs, like rent, energy prices, wage bills and insurance, are traditionally costs that are not questioned by management teams or operating partners. But lockdowns led many companies to start thinking creatively about their cost base. Companies with big, empty offices wondered whether they could negotiate their rent or insurance down and manufacturers looked at their plant equipment.

“Through the pandemic companies were forced to take a different view of fixed versus variable costs,” says Mussi of Bain Capital.

He points to one of his portfolio companies that saved money by renegotiating its energy costs – something it never would have considered in normal times. Mussi says that he and all his portfolio companies now have a “much more dynamic” approach to fixed costs going forward.

6: The world has changed… but not that much

It may have felt like the world underwent a fundamental shift over the past 18 months, but many operating partners stress continuity.

The pandemic has accelerated long-predicted trends, such as the rise of remote working, the growth of online retail and the increasing value we place on health and wellness. It has also shown the value of investing in businesses with reliable cashflows that are less subject to the vagaries of the economic cycle. But in many industries, there has not been a fundamental shift to the way business is done and the core job of the operating partner remains the same.

Triton Partners’ Köhlin says this has strengthened the case for investing in businesses that will benefit from long-term macro trends. “I think we are even more convinced that we like to invest behind the trends. When the stars are aligned, things can move very fast.”

Köhlin adds that the pandemic forced companies to accelerate or put on hold aspects of their value-creation plans, but the challenges those companies face remain broadly consistent. “When we look back at the plans that we had before the pandemic, the three, four or five most important cornerstones in our investment thesis and in our planning are still the same,” he says. “Our strategy is to buy good companies with problems. Those problems that were there before the pandemic haven’t gone away.”