“Engaging, up skilling, delivering value and 2010!”

Everyone in Britain is aware that the new Government will make tough and very unpopular decisions to address the £160Billion++ budget deficit and the national debt which is expected to reach £1.4Trillion: some of the more likely options are increasing the rate of VAT, reducing public sector pay and pensions, cancelling infrastructure projects, increasing the retirement age and cutting welfare benefits.  All of this will unfold in the context of great uncertainty regarding the economy and financial markets here and abroad. Whilst there are some refreshing “seeds of commonsense” appearing; no one can accurately predict what will happen if the Government’s cures are not favourably received by the market; exchange rates; tax rises and spending cuts; inflation; interest rates; perceived Chinese bubble bursting, impact of US bank regulations or the debt crisis in America. Indeed, with Britain’s unspoken total debt (national and household debt, but not including pensions and off balance sheet liabilities) approaching that of Japan’s at almost 300% of GDP, and the rate on 10-year gilts having risen recently to 3.89% (settling at 3.79%), some intelligent ‘guesses’ can be made about the UKs macro economic climate.

But, even with all these great excuses to do nothing, businesses can respond positively and proactively to this very uncertain and potentially risky environment, and that applies particularly to bank, equity investments, new and old.

 

PE funds and banks need to shift their focus from

  1. PLAN A: Market-Led Value Creation i.e. realising financial value through financial engineering or divestment

To

  1.  PLAN B: Business-Led Value Creation; creating the underlying ability of a business to deliver sustainable cash flow.   more

How should banks and private equity investors approach Plan B?

  1. 1.        Mindset Change –Private equity investors need to take on board a mindset change from financial engineering to business operations. more
  2. 2.        Business Value Creation Creating a emerging view of the future in an uncertain environment needs to be at the heart of the new business plan, with innovation, operational excellence, marketing effectiveness, and customer service are some examples where a PE fund can actively steer a management team to focus their efforts. But, enormous agility will also be required to address new market conditions when (not if) they emerge, and experienced globally aware managers must be in place to move in concert with what could be a paradigm shift in business reality. More
  3. Business Plan To get investment most businesses need support to define a successful outcome and investor exit. Build a 3-5 year business GROWTH plan, not one which simply cuts cost from a financial perspective to build profit in the short term. Be prepared for lower profits in some industries for the next 3-5 years, or until the market dictates otherwise, and have more importantly develop the agility and low fixed cost base to respond.
  4. Management Team; re-assess the current management team and determine whether or not they can deliver in these unstable times and under the new business plan, and able to work with its employees to maximise efficiencies.
  5. Measure, Manage, Improve, “If you can manage it you can improve it!” Cash flow management is key; but with full consideration to innovation; one of the fundamental drivers for private equity investors in pursuing certain investments. Business improvement initiatives need to include establishing a well structured team, cash flow management, up-to-date technology, robust and highly flexible business processes, effective revenue generation plan, a constantly re-aligned business marketing/sales strategy that will be successful in a rapidly changing, competitive market place. Three key KPIs to measure are: Cost to Create, Cost to Produce, and Cost to Service, with minimal fixed costs.

The decision is yours as to when to act. On June 22nd public sector budget cut plan; 30% of shoes and c40% of PCs are bought by the UK public sector, maybe a good time to review and challenge your existing support requirements? A good process is still not enough; you need the means of engagement as well as the mandate. Good ideas and processes are useless without the ability to engage, deliver change and in the process of doing so build value. May sound easy? – have you ever tried engaging with an owner manager in a turnaround – that’s why icebreaker take the development of our team, engagement process and evolving own agile model so seriously…

 

Toby T.

Business Executive with Icebreaker Executive Interim Management Limited E: office@icebreakerexecutive.com T: 0207 193 5518.

Our findings are taken from an article written by Toby T and Gerald H, “Challenges Facing Private Equity Backed Investments”