PricewaterhouseCoopersReviving those languishing investments 2
Agenda
Introduction and welcomeBackground Market situationImpact of languishing investments on portfolio returnsThe Control WatershedEarly warning signsExperiencing a turnaroundLessons from the marketplaceSummary and Q&A
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Summary
Need to inject time effort and energy in your languishing investmentsReal value-add for the exitWatch out for the loss of controlWarning signs are there to see……act on themBut it is hard work – and needs close attentionPrevention is better than the cure
PricewaterhouseCoopersReviving those languishing investments 4
Discussions, interviews and assignments with
BanksPE Houses
Background research
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Market situation-it’s getting harder
Increased competition for deals
Much greater vendor sophistication
Increasing requirement to demonstrably add value to deals
Increasing number of unexited companies in portfolios
Dramatic decline in stock markets has eliminated PE arbitrage
Limited scope for exit via IPO
Exit valuations and multiples likely to be lower
Increased competition for future funds
So what is your new valueSo what is your new value--added? added?
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PE house approaches vary widely
Passive Investor
“ Management’s role to run the business”
• Non-exec board participation• Monthly figures• Annual review• No team allocated to portfolio
company management• Financial expertise driven
CorporateOwner
“Our role to create the value, working closely with management”
• More than one non-exec appointment
• KPI reporting• Joint strategy development• Involvement in business detail• PE house staff dedicated to
portfolio companies
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Companies in portfolio
Capital and human resource dedicated
20%
80%
100%
Stars
“Middle 60%”
Under performers
60%
40%
Untapped potential often exists in “middle 60%” of portfolios
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Why performance starts to drift
Performance targets not achievedCulture doesn’t make the transition to owner/managerManagement disillusionment/departuresInvestment manager boredom and lack of focus“Satisfactory underperformance” not noticedCompetitors attack on signs of weaknessDownward spiral
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Work on both the profits and the prospects – multiply the impact
EBITDA
Exit multiple
Exit value
£10 million
5X
£50 million
Current
£11 million
6X
£66 million
Potential?
£9million
4X
£36 million
Potential?
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The Corporate Demise Curve©
IN TROUBLE,NOT AWARE
LOST CONTROL
IN TROUBLE,BUT IN CONTROL
The ControlWatershed©
Comfort
Concern
Crisis
Catastrophe?
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So what are the warning signs?
Management Financial
Soft
Operational
Embarrassing complexity
Can’t articulatestrategy
Failure tomeet deadlines
Incomparablecomparatives
Director churn
Inability toprioritise
Increasing tensionwith stakeholder
Excessive growth
Infinite ‘one-offs’
Opaque transparency
Wild fluctuations
Regular policy changes
Business plan lacks objectivity
Superficial forecasting
(Non) working capital
Loss of key customers
Unattractive products
Downgrades
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So how do you get out of this space?
TURNAROUND POINT
TURNAROUND or EXIT
CHANGE AGENT
APPOINTED
OPERATIONAL SKILLS
THE
TURNAROUND
CORRIDOR©
TACTICAL SKILLS
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Experiencing a turnaround –how it feels…
Who am I?Initial prejudicesWhat happened?My view of the processResults achievedLessons learnt
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You never know what’s round the corner!
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Learning from the market-place
Lessons from 10 recent turnarounds– Act on your business instinct– Management – to change or not to change?
Actively manage a deal from completion to exit– Stay close after completion– Introduce formal and informal processes
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Financial Strategic
Operational
CorporateFinance
Approach to turnarounds
Future directionCompetitive positionMarket attractivenessGrowth opportunitiesFuture threatsCustomer perceptionPricing trends
Supply chain performanceManufacturing operationsService deliveryKPI reportingPurchasing
CashWorking CapitalControlsBalancesProcessesForecasting accuracyBlack holes
Exit considerationsValuation impactPotential buyers/targets
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Lessons from10 turnaround projects in last 12 months
6 stimulated by PE House, 1 by management, 2 by banks, 1 by active fund managerMost common causes were additional financing requirements or management/PE house disagreement
8More aggressive cost reduction6 (out of 7)Additional funds
8Change in strategy
7Could earlier action have been taken
Yes
1 Receivership3 off sick list 5 WIP 1 “in denial”
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Lessons from turnaround projects –keep or change the management?
Management – part of the solution or the problem?Management were changed in 2 cases, the jury is out on 3 or 44 had already recently changed management
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Lessons from turnaround projects –keep or change the management?Deciding whether to seek management change
Is situation caused by bad luck, bad management or fraud?
Have management been open about the situation?
Is there a shared vision for the future? Can there be?
Can the CEO accept his role in the history?
Does the CEO have the capacity to change?
Is the CEO a block to effecting necessary change?
Have CEO-fund provider trust relationships been broken?
What is the quality of the rest of the team?
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Learning from the marketplace
Lessons from 10 recent turnarounds– Act on your business instinct– Management – to change or not to change?
Actively manage a deal from completion to exit– Stay close after completion– Introduce formal and informal processes
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Stay close after completion, support and monitor closely
Early problem identification and rapid action can significantly reduce the potential downs
Root causes of failure often appear within 6 months Management often struggle under PE ownershipMarkets can and do change very fastCompetitors see deal activity as an opportunity Generally, more cash is needed than expectedClose Investment manager/management relationships can lead to delays in taking corrective action
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Best practice process for improving individual company performance
Complete acquisitionTime
Take Control
Business Review
DisposalPreparation
30 days pre deal
1st 100 days
18 to 24 months 12 months pre exit
Post Deal Review
6 to 9 months
Investment Manager time and attention
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Need to inject time effort and energy in your languishing investmentsReal value-add for the exitWatch out for the loss of controlWarning signs are there to see……act on themBut it is hard work – and needs close attentionPrevention is better than the cure
SummaryQuestions and answers
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