NextWave Private Equity

Jeff Schlosser, EY US Supply Chain Transaction Leader and Jay Camillo, EY Americas Operating Model Effectiveness Leader, explain why a post-pandemic supply chain will prioritize resilience over efficiency.  Visit ey.com to read our latest private equity perspectives. COVID-19 has forced companies across all industries and geographies to pivot towards a “new normal” related to their supply chains. Supply and demand plans became irrelevant practically overnight as companies reprioritized to serve critical needs Lean, linear supply chains are losing favor to parallel structures that allow executives to pivot production in response to demand shocks Traditional levers of consolidation and rationalization will lose popularity and efficiencies will have to be found elsewhere amid rising costs and condensed margins Companies are modelling future scenarios to plan for catastrophic events Regulation is widely anticipated to be a global response to the pandemic, as companies will be increasingly scrutinized (and rewarded) for supply chain resiliency In order to forge a sensible path to this new world, tax teams will need to work closely with business and operations teams and ensure tax efficient measures are considered including evaluating the challenges and opportunities inherent in this pivot from lean to agile.   Near term: for liquidity and tax liability management, internal reviews of legal contracts and government agreements to find opportunities for flexibility and efficiency Medium term: as companies pivot, external evaluation of new incentives as tax authorities seek to help companies cope Long term: as companies move to resiliency, shifts of manufacturing require close evaluation of exit liabilities, IP development and use will require careful review, and indirect tax consequences in the excise, customs and VAT area will require management

Nick Boaro and Sven Braun of the EY Transaction Advisory Services and Working Capital Group explain why freeing cash from working capital can allow PE to prolong sustainability, realize value sooner and invest earlier. Visit ey.com to read our latest private equity perspectives. Four reasons why a PE-backed company would want to optimize cash flow now include: Up to 7% of sales can be unlocked and released quickly. Unlocking cash is the cheapest source of liquidity. Companies with optionality are in a stronger position to reinvest for growth. A successful outcome in one portfolio company can inspire other portfolio companies to take the same journey. Working capital is the cash a company has tied up in assets less the cash it holds as a liability; a financial metric that represents the amount of day-to-day operating liquidity available to a business. Freeing cash from working capital is the cheapest source of additional liquidity often unlocked to pay down debt, fund day-to-day operation or fund strategic initiatives. Today, private equity funds and their portfolio companies are able to unlock on average 5%-7% of revenue in cash flow improvement within 3-6 months of completing 8-12 week operational improvement programs. A company that optimizes working capital increases liquidity, improves predictability of cash flow and increases visibility in all areas of cash. Because of COVID-19, many PE funds are laser focused on forecasting and releasing cash to prolong sustainability, realize value sooner and invest earlier. PE funds are asking for liquidity forecasts from across the portfolio to measure exposure, identify opportunities and quickly accelerate cash flow for as many companies as possible. Where corporations have complex hierarchical structures that force them to move slower with more measured outcomes, PE is able to act more quickly. Having a “cash culture” is important for any company, especially now. After all, cash is the cheapest source of liquidity a business can generate, and it provides critical funding in either a downturn or growth period. Healthy cash flow is a positive indicator of a company’s preparation for an economic downturn; however, it isn’t too late for companies to improve cash flow, so they have greater optionality when opportunities arise.

Jennifer Shearer and Alexander Ludwig Reiter of the EY International Tax & Transaction Services group help PE funds and portfolio companies understand and manage the tax implications of recent coronavirus stimulus packages. Visit ey.com to read our latest private equity perspectives. COVID-19 stimulus legislation in the US and Europe is designed to ease the strain on businesses with particular focus on small and medium sized companies, keep people employed, increase liquidity and provide access to much-needed capital. Loan programs, cash tax defer programs, tax incentives and compensation for reduced working hours are all being deployed. Key focus areas for private equity are as follows: Immediate: focus on liquidity and establishing task forces to triage needs across the portfolio. Short-term: use a coordinated approach to evaluate need and eligibility for assistance. There is a lot of detail and nuance to consider when evaluating these programs, as loans have restrictions and some PE complexes may not qualify depending on how they are structured. Differences in policy adoption across US states and between European countries also adds complexities. Medium term: take time to understand the fund and portfolio structure in order to determine which measures can be taken without inflicting damage. Debt buybacks present an attractive opportunity but come with important tax considerations. Longer term: broken supply chains at the portfolio level will need to be fixed. Global sourcing structures will be re-evaluated. The “just-in-time” inventory management strategy will also be re-examined as company seek to protect themselves against future global disruptions. Digitization will drive improvements in sourcing practices and multi-channel distribution. Lastly, a focus on improving “corporate hygiene” by investing in cybersecurity and technology that enables remote ways of working will remain top-of-mind.

Karim Anani, Financial Accounting and Advisory Partner, and Lukas Hoebarth, Strategy & Operations Partner explain how to manage a remote close in today’s volatile financial and regulatory environment. Visit ey.com to read our latest private equity perspectives. While there has been a growing trend towards remote (or virtual) close for several years, the need for this capability has not only been accelerated but thrust into an volatile environment. Unforeseen complexity due to macroeconomic uncertainty, regulatory change, remote ways of working, incomplete information, workforce uncertainty and cybersecurity risks threaten vital systems of control that must now pivot to cover the risk mitigation they were designed to provide. Private Equity CFOs and finance teams are instrumental in connecting the dots throughout the organization and will play a pivotal role as the business partner to the CEO. Analysis of short-term liquidity forecasts, tax implications and business plans will impact investment decisions and expose resource constraints across the private equity portfolio in the weeks and months to come. In order for CFOs to cultivate successful remote close outcomes, they must focus on: Communication: holding regular meetings and establish expectations for communication Collaboration: establish and maintain healthy ways of remote working Preparation: organize a PMO to map the close calendar, identify exposure and predict/solve for different scenarios Motivation: keeping spirits high and nurture positivity Five complexities will drive additional focus on the upcoming reporting cycle: Delays in the close process due to remote ways of working, personal distraction and impact of available (or unavailable) technology Different/additional analysis will be required to “close the books” Incomplete information from upstream operational activities and suppliers Sensitivity of data in a remote working environment brings cybersecurity and potential vulnerabilities into question The ability to ensure the controls environment is sufficient to ensure accuracy for stakeholder signoff

Mike Lo Parrino, EY Americas FSO Private Equity Leader, explores the evolving role of the private equity CFO. Visit ey.com to read our latest private equity perspectives. In the seven years since EY has conducted the Global Private Equity (PE) survey, private equity CFOs have assumed increasing responsibility for the overall operations of their firms. They have expanded their oversight beyond the traditional finance functions to include IT system implementation, investor relations and cybersecurity, even as the industry has experienced record growth. Now they are expected to take on an even more strategic role, assisting with the decision-making and deployment of new investment products, location strategy and a changing investor profile, while also keeping a mindful eye on increasing margin pressures. At the same time, private equity CFOs are also leading the effort to find ways to deploy innovative new technologies, particularly those that leverage next-generation data and robotics. As part of their more strategic mindset, they are also helping to elevate their firms’ overall talent profile and interact more frequently with portfolio companies. The PE CFO’s role has evolved over the past seven years in five key ways: The CFO spends more time than ever on asset growth, innovation and talent. CFOs must strike a balance of tactical and technical skills to be effective, strategic leaders for their entire organization Attracting and retaining diverse talent combined with an inclusive culture are top talent management priorities CFOs consider advanced technology solutions to complement new, strategic responsibilities The next generation CFO will leverage data for the benefit of both the private equity firm and portfolio. To read the full survey, visit ey.com/privateequity. 

Andrew Wollaston, Global Private Equity Transactions Leader, and Peter Witte, Global Private Equity Lead Analyst, discuss how PE firms are planning for a potential market correction and the opportunities it might afford.  Visit ey.com to read our latest private equity perspectives. While PE-backed companies performed generally well during the GFC, over the last decade, the PE model has evolved in a number of ways that make it even better prepared for future downturns: The industry has more capital at its disposal PE has diversified in ways that increase its resilience. PE firms have expanded their operating capabilities. LPs are more sophisticated and have access to better portfolio management tools. Perhaps most significantly, PE firms are prepared to deploy more aggressively than during the 2008 recession

Jackie Kelley, EY Americas IPO Leader discusses IPO readiness for private equity-owned companies. Visit ey.com to read our latest private equity perspectives. An IPO is often a desired exit for private equity-backed companies. Soaring valuations in sectors, such as technology and biotech have led business leaders to choose an IPO to secure both investment and trust from the public market. Companies that choose an IPO must prepare not only for the event itself but also to meet public market shareholder expectations around growth, transparency, accountability and performance. An assessment of IPO readiness is a critical step in ensuring a company is prepared not only to enter the public markets, but to be successful in both the short and long term. Key takeaways Start discussions about IPO readiness 18-24 months in advance. Team with experienced advisors who have seen the pitfalls and know how to avoid them. Invest to mature back-end infrastructure, build/scale critical processes and acquire the talent needed to run a predictable business that will continue to scale and can meet the regulatory compliance requirements of the public market. Focus on creating a strong foundation for both the IPO and for the company’s rapid growth post-IPO. Private Equity investors should not expect to fully exit at the time of IPO as existing shareholders are expected to remain invested for a few years. 

Charles Honnywill, EY UK&I Divestiture Advisory Services Leader, discusses specific actions PE fund managers can take to prepare for a successful, well-timed exit. Visit ey.com to read our latest private equity perspectives. It can be difficult for PE fund managers to have a comprehensive outside-in perspective when considering the sale of a portfolio company due to what Charles calls a “baggage of ownership”: the inability of a fund manager to adopt the mindset of a likely buyer due to their proximity to an investment. As a result, PE funds historically have not always planned as methodically around the exit of a business as they do upon its investment. In this episode, Charles explains this challenge, articulates the benefits of an IPO vs. outright sale and recommends specific actions PE fund managers can take to prepare for a successful, well-timed exit. Key takeaways: While IPO remains the most popular exit route, other options include an outright sale to a strategic buyer or PE fund PE funds are starting to think more methodically around exit, but there is a trend toward greater preparedness The top five exit considerations for a PE-backed company include:  Create a plan 18 months prior to expected sale Consider the equity story of potential buyers Make necessary changes to your management team Consider the timetables of the market and likely buyers Consider your sale from a financial, operational, commercial, tax/legal and regulatory perspective

Glenn Engler, EY-Parthenon Global Digital Leader and EY Americas Strategy and Transactions Digital Strategy Leader discusses how and where digital competence can be incorporated into the diligence process and manifested in a PE firm or portfolio company’s business strategy. Visit ey.com to read our latest private equity perspectives. The word “digital” can be interpreted in a multitude of ways, but it’s important for PE firms and CEOs to start with a broad view regardless of industry or competency in the context of a deal. Because digital impacts every aspect of a business, digital strategy should be owned by the CEO, not siloed into individual functional areas such as marketing or technology. PE firms, whether considering investment decisions, operational improvements or driving growth, must inject digital competence throughout the diligence process and business strategy to fully understand the value in both the target landscape and company DNA.     Key takeaways Digital touches every aspect of a PE firm or portfolio company, so the CEO should own a digital strategy inspired by the needs of the business and customer. Digital competence is critical in understanding a target’s value and must be woven throughout the diligence process. PE firms must look holistically and more upstream where PE, VC and corporate dollars flow to understand where value is created in the target landscape. PE firms can explore digital in driving operational expertise and growth in portfolio companies with intelligent automation, digitizing supply chains, cloud, omnichannel/ecommerce, "frictionless" customer experience and new revenue models.