Life in PE when Things AREN'T Going According to PlanO
On Tuesday, I wrote a post about life in PE when thing are going according to plan. My focus was to give everyone a general feel and a high level overview for what portfolio coverage is like since it takes up a great deal of your time as an Associate. And, let's face it, the health of the portfolio is the lifeblood of a fund. It not only determines the net worth of the partners over the course of five to seven years, it also determines the true longevity of a firm.
If your portfolios perform well, your valuations will show it. The value creation will be evident and you'll probably look at a couple earlier-than-expected exits. And when it comes to raising a new fund, this goes a long way. Locking in solid returns with timely exits is an absolute boon for fund raising, both for bringing back existing investors, increasing their stakes, and attracting new LPs.
But, what if the portfolio isn't performing up to par? What are the implications?
What is life like at afirm when things aren't going according to plan?
As with my post on Tuesday, this post is primarily concerned with life as an Associate in PE. The stresses of an underperforming fund on a more senior employee of a PE shop are far different. Having money tied up in an underperforming fund can cause massive stress and shows what it really means to have skin in the game, so to speak.
Having several friends who work(ed) at various PE funds throughout the country, I've gotten to hear a myriad of perspectives. I was fortunate to work for a fund that performed pretty well, without any massive hiccups. Others were not so fortunate.
Or were they?
Typically, firms have weekly meetings in which all of the Partners of the firm, along with the junior employees, meet to discuss the state of the portfolio and any new deals that are working their way through the pipeline.
When things are going well, these meetings are pretty straight forward. The Partners have a pep in their step and act as the rightful masters of the universe that they are. Things change quite a bit when companies start shitting the bed.
Tensions rise. Tempers flare. And while things are analyzed appropriately with facts taking precedence over emotional responses, it's hard to restrain frustration and hard feelings when so much money is at stake.
Now, the vast majority of the time, a company's poor performance doesn't happen overnight. Like a floundering relationship, the warning signs have been there for a while and it's been on a steady decline. You try and work through the problems, and sometimes you can. But, when you can't, that's when things get tough. And, unlike a relationship, you can't just break up and move on. You're stuck with the company until you either fix the problems, exit via a sale, or it's forced into some sort of bankruptcy process.
A friend of mine's fund had just such a company. It was an industrial services business that was crushed by the slow economic recovery and a slow but steady displacement of its technology. Over the course of six months to a year, the problems grew larger and larger. And their weekly firm-wide meetings grew more and more intense.
It started slowly, with the lead Partner on the coverage team putting the company's management team on notice. As things continued to erode, it led to weekly update calls. Before long, the banking group was starting to get nervous. This is where PE can really get interesting for an Associate. While it's definitely stressful and Partners are starting to lose their shit, an Associate can really dig into some unique stuff.
As the company continued to falter, my buddy got to work on some really interesting stuff. For one, he worked with a Partner and a search firm to find potential replacements for members of management. The management team was great during boom times, but seemingly impotent in dealing with the company's trouble areas. He was sent to work with the company on-site for weeks at a time, pitching in on just about any project he could. This meant getting his hands dirty in the real nitty-gritty details. Digging through the rawest financials imaginable to help better understand what areas management needed to focus on to right the ship.
With the banks' worries growing, it was up to the PE firm to work up a short-to-medium term action plan to restructure the business. This meant putting in additional equity and diluting returns, but it also gave the banks confidence that the fund was serious. The Associate worked alongside a group of turnaround consultants and the lead Partner on the coverage team to help put together a thorough turnaround plan for the banks. After several months of hard work and some time under the turnaround plan, the company's performance started to improve. While the return on equity will be diluted, it's still better than the alternative.
My friend who got to work on this company said it was among the best work he's ever been involved in. Challenging, interesting, and very unique amongst his peers. For a guy who wants to go to b-school, this ought to go a long way towards helping him craft some fantastic essays. It's also a great deal more interesting than my experience was. So, while you want to go to a winning fund, it's worth noting that a fund with challenged portfolio companies can lead to a unique and potent experience for an Associate.
Anyone on WSO get to work on any challenging portfolio companies? Anybody have any PE war stories they'd like to share? Or better yet, does anyone have any fun stories of Partners going wild when their companies start to shit the bed? Leave your thoughts and questions in the comments.