Private Equity is feeling the pressure on PortCo financing and targeted exits.

Concurrent macroeconomic disruptive forces have intensified the pressure on portco operations and performance, as an elevated inflationary and interest rate environment – allied to persistent supply chain challenges – create highly constrained trading conditions.

Deal flow has been suppressed considerably by interest rates and the tightening financing climate, while portcos acquired in the past two or three years on the basis of strong revenue and growth plans are now facing a very different outlook.

As a result, we see the emergence of longer holds and more pronounced EBITDA and cash pressures on portcos, as maturities also loom large in the next 12-18 months. Mitigating the potential for value erosion and improving access to capital for future growth are critical, as this environment presents a very real risk of losing the keys to prized assets. 

At this time, it is imperative that PE portcos optimise cash flow, improve their liquidity position, and boost EBITDA performance, all of which can be driven through a key enabler of Sales & Operational Planning (S&OP), and three vital levers within:

  • Customer Service and Revenue / Margin improvement
  • Optimised Inventory management
  • COGS reduction via efficiency and effectiveness gains

Applying an S&OP lens can directly impact operational and financial performance
Liquidity can be labelled as a problem purely for finance teams. However, operations are vital in preventing or solving cash problems. As visualised below, an approach that reimagines how operations, sales, and finance work in concert can rapidly unlock the true value related to cash and EBITDA.

Business leaders can derive an honest, holistic assessment of their sales, operations, and finance positions by asking themselves a series of questions that may quickly identify potential organisational blind spots and threats to business performance:

Customers and sales:

  • Is your sales operation optimised and focusing on profitability as well as volume?
  • Are your customer support and service operations minimising customer churn; can you identify customers at risk?
  • Do you understand your pricing constraints and opportunities at a granular level?

Operations and production:

  • Do you understand the correlation between your manufacturing capabilities or supply base and your liquidity?
  • Do you know the biggest operational risks and impacts to cash?
  • How do you take control of inventory?

Forecasting and planning:

  • Are forecasting processes sufficient in the current environment?
  • Is a lack of clarity in demand forecasting negatively impacting inventory levels?
  • Do forecasting and planning processes integrate with the P&L to allow for a financial view of the enterprise (income, cash flow, balance sheet)?

Liquidity, cash, and EBITDA:

  • Can you fund your inorganic and organic growth plans at a higher cost of capital?
  • Are your shareholders happy with your capital productivity, and are they demanding cash distributions?
  • Can you access capital at the same levels and under same terms to which you’ve become accustomed?
  • What will happen to your balance sheet and EBITDA if you have to refinance at a higher interest rate?

With answers to some or all of these questions in mind, the importance of refining S&OP practices comes sharply into view, bringing three key mantras to the fore to counter the intense operating headwinds and deliver improved results fast: 

  1. Do not underestimate the criticality of cash. This is vital in a market characterised by higher costs, evolving consumer behaviours, and unpredictable sales patterns. Balance sheet burdens must be addressed by reducing working capital to free up cash and improve visibility of short-term liquidity needs. S&OP can play a vital role alongside Finance in these coordinated efforts to boost EBITDA.
  2. Sharpen the pencil on rolling sales forecasts. This will go a long way to building greater visibility around cash and earnings positions, not to mention purchasing and marketing activity. When effectively interlocked with broader financial projections and agile operations, companies can move through challenging economic environments as one cohesive unit that is laser-focused on keeping cash flowing and driving EBITDA improvement.  
  3. Orient operations towards profitable products. Organisations’ approach to inventory management, production process, and the highest quality service of their most valuable customers stands to be reimagined when a light is shone upon which are the most profitable products within a portfolio. However, this approach can only be achieved in close collaboration with finance and sales teams, shifting from a siloed mentality to one that prioritises what matters most in a tough trading climate – cash and the bottom line.