Talking Points: Upgrades Required

Portfolio companies are currently buckling under doubled debt repayments and the mounting costs of embracing AI, forcing many investors to hold onto assets far longer than they ever anticipated. How did we get here?

In a recent post, Lee McCabe described 2021 as "peak nonsense" for the private equity industry. He pointed out that careless valuations and ill-thought strategies are largely to blame for the dry powder issue afflicting the sector today. An era of low interest rates and general complacency generated a massive tranche of assets that were simply not fit to withstand the macroeconomic and microeconomic headwinds we have seen since 2022.

The solution he suggests is a return to painfully boring basics.

Pricing needs to be fixed. Sales must be measured properly. Marketing has to be cleaned up. Procurement should be executed straightforwardly, without pretending it is some grand transformation. Data needs to be clean enough that teams can stop arguing about whose spreadsheet is lying. And, crucially, management must be upgraded where necessary.

It will surprise nobody who has read my previous thoughts on this topic that I see particular value in this last point.

Upgrading management is obviously essential when the need arises, but the real challenge for sponsors is to minimize the risk of getting it wrong. A hiring mistake in the current climate guarantees steep financial costs and further business stagnation at exactly the wrong time.

Right now, the odds are stacked against success. Sponsors and operating partners are time-poor and under heavy pressure to get the situation resolved quickly. Recruitment agencies are engaged and financially incentivised to place a candidate equally fast. Because of this rush, in the vast majority of cases, absolutely no independent verification of the candidate is ever carried out.

At Hopehead, we conduct these critical checks for our clients.

This process involves rigorous background research paired with a series of in-depth reference interviews. We gather insights from people who have worked extensively with the candidate over many years leading up to the present day. This provides a highly detailed, objective view of a candidate’s true strengths and weaknesses across a wide range of skills. I will not go into all the details here, but it is incredibly common for our research phase to surface major knock-out issues that would have otherwise gone unnoticed.

Devoting this level of time and effort ensures you actually get the right person into the job. You need a leader with the best and broadest set of skills to take the company forward, because they are the ones who will ultimately need to implement all of those other “painfully boring workstreams” required for long-term success.