By Kari Lukovics , Axial 
Back in 2007, Harvard Business Review stated that the “Strategic Secret of Private Equity” was the ability to buy, improve and sell businesses swiftly alongside an “aggressive use of debt.” At the time, there was concern for cheap debt drying up and seasonal interest rates. Now, nearly a decade later, private equity professionals are not just concerned with securing debt, but with securing it from the most strategic source, with the best possible structure.

“The Great Recession changed the mindset of many in the private equity space as traditional bank loans dried up for companies in PE firms’ portfolios,” said Eric Myers of Diversified Lenders, Inc. “PE companies got educated in alternative lending and benefits of fewer covenants, more liquidity, and approvals for their transactions.”

Many more established firms or those investing out of their second or third funds have reliable sources of debt for a deal. The majority of the time, the deal works out between the two and the deal closes as planned. But in other instances, a fund manager’s M&A rolodex falls short for a more complex deal, and new lending relationships are necessary in a hurry.

“Obviously it is important to work with lenders who are supportive of a borrower’s growth strategy, but it is critical to work with lenders who have the experience and flexibility to work in a cooperative way when things don’t go as planned,” said David Shapiro of Marquette Capital Partners.  “We all know that deals rarely move in a straight line, and it is likely that lenders entering a transaction on the most aggressive terms will be even more aggressive if a deal hits a bump in the road.”

While buyout volume has been low across the market so far in 2015, debt structuring remains a valuable skill for private equity investors to possess. But looking past financial engineering, best-in-class funds and their operators are placing emphasis on new lending relationships by making more time for introductory calls, knowledge-sharing, and meetings during business travel or industry conferences.

With firms feeling the pressure to be more specialized and to get deals closed faster, what should a PE firm, family office or investor look for when creating new lending relationships? An aggressive approach, experience and adaptability are among the most important indicators of a potential debt partners in a deal. When courting a new lender, it should be best practice to ask about their most recent unexpected bump in the road, or their team’s trickiest transaction.

Although US targeted M&A volume has surpassed $1 trillion in the first half of 2015, it’s still a seller’s market. To stand out in the sea of available capital, private equity firms are adding strategic planning to the list of what they can provide to would-be portfolio companies.

For competitive firms, however, strategic planning isn’t just a way to stand out–a developed growth strategy is essential to driving value creation, which ultimately, means higher returns for their investors. For private companies wondering what strategic planning entails exactly, they might consider that being backed by a PE firm can allow them greater access to operational support, external perspective, and detailed process counseling — all in an effort to maximize growth.

Why Private Companies Get It Wrong

Developing a growth plan is usually left to company executives and members of the board, but private equity professionals are finding their niche in situations where company planners hit a wall. It’s easy to see why strategy development causes anxiety among executives: it’s essential to company success, but there seems to be no end to the strategic planning tools that can provide a competitive advantage.

It’s easy for management teams to stay with what’s comfortable, but value creation doesn’t favor those stuck in an innovation rut. Whether due to lack of experience building a tailored strategy or an operational inabilities to connect analyses, company executives often lack what private equity professionals can quickly bring to the table having seen the outcomes of countless growth planning processes.

Operational Support

While lending an operating hand to portfolio companies has traditionally been an offering of larger private equity firms, it’s increasingly becoming a mainstay of the entire industry. These resources generally come in the form of access to and advice from former general managers, consultants, and a host of sector specific experts.

Although less common, some of the best private equity firms also offer analytic support and data collection expertise. Harnessing the vast array of big data in a way that companies can leverage in strategy planning is an often overlooked but increasingly essential key to value creation.

An External Point of View

For most private companies, strategic planning is a collaborative effort amongst the management team and the Board of Advisors. For both participants, it’s a delicate balancing act of wanting to maintain independence and cooperation while acting in the best interests of the company.

Though they’re invested, a private equity firm can serve as a somewhat external party, able to worry less about this balancing act when offering advice and insight in initial planning processes. Taking a more hands on approach is one of the most important value adds private equity can provide in the early stages of conceptualizing strategy for business growth and development. If done with respect, the constructive criticism brought to the table by a PE firm viewing things from “the outside” is critical in answering both granular and conceptual strategic questions that help set the framework to move forward.

In-depth strategic process development

Because private equity firms make a living maximizing value within companies, they have a wealth of experience optimizing and understanding the problems common to business operations. They’ve been down the road before, so offering in-depth guidance during the strategic planning phase is one of the most valuable and obvious contributions they bring to the table.

There are many ways to get strategic when running and growing a private company, but it starts with defining where the company is now, where they want to be, and what resources they need to get there. Leveraging the expertise and insight of private equity firms steeped in a company’s given industry or with specific experience with other companies in similar situations can help a company more fluidly get from Point A to Point B. Whether it’s identifying growth opportunities, developing an action plan, or helping design the feedback system for when things don’t work, private equity is increasingly becoming the way company executives fill in their resource gaps and become more strategic.


Article by Axial