We recently caught up with Christian Hamilton, Managing Partner at Tenzing, an independent private equity (PE) investor that invests in high organic growth UK SMEs valued up to £75m.
How are you supporting your portfolio companies at this time?
We’ve been providing operational support with certain issues which are common across our portfolio companies. For example, we’re providing a central source of information and help with the government support schemes, to avoid having our eight portfolio companies each replicating the work. Another example is the way Glenn Elliott, our Entrepreneur in Residence, has been assisting our portfolio companies with HR-related considerations and providing them with assistance with communications with employees, customers and suppliers.
We’ve also been very struck by how the portfolio companies are pulling together to support each other and share practical help and learnings. This is something we’ve always emphasised and facilitated, and its importance is even more visible now.
What’s the key advice you would give to entrepreneurs at this time?
Nobody has perfect information at the moment. The important thing is to make decisions quickly, and then to work hard to ensure the board and employees rally behind them. We have found that our portfolio companies’ employees have got behind the decisions of their boards very quickly, and this is in large part down to very high levels of communication and transparency. And that is the second key piece of advice I would give; don’t underestimate the very high levels of communication required at this time, whether that’s to employees, customers or suppliers.
The third piece of advice is to focus on liquidity and cash. A shift in mindset is required, in the short term at least, from a growth focussed CEO to a “battlefield CEO”, where cash and liquidity are king.
How will the current pandemic impact the types of companies you will be investing in this year, if at all?
Our focus is on market leading businesses with a technology bias and that won’t change. The current crisis is re-enforcing the need for technology and that will continue to drive demand for innovative software solutions. We do however expect the economic environment to become tougher, and that will increase our focus on software that improves operational efficiency and generates genuine measurable ROI.
One key focus for us this year or us will be looking for founders who really want to take advantage of the opportunities being created by the current situation. A downturn can be an amazing time to build a business; to drive sales and marketing, build market share, build product, make acquisitions. We will be very keen to partner with founders who really want to attack their market, and want to have the right ownership structure and capital in place to do so.
What can companies do to maximise PE interest in the current climate?
We expect most companies to have trading wobbles during this period. The bigger question for us is how will the business trade in a recession? How will its end market be impacted longer term? How do the market position and the fundamentals of the business look longer term? We are investing for 3-4 years not the past few months, and building confidence over how a company will trade over that period is what matters.
Part of that, and particularly important in the current climate, is demonstrating a close relationship between a company and its customers. Are they asking the question what can I do for my customers and how can I serve them better? How often are they in touch with customers? Do they have a good working relationship? What this boils down to is whether a company is listening to its customers and adapting accordingly.
What do you think will be the impact this year/beyond on PE investment levels?
Deal volume will fall. I expect Q2 volumes to be very low, picking up slowly in Q3.
That said, the need for the solutions PE provide certainly won’t disappear. Most founder-operated businesses need some sort of change to their ownership structure at some point; founders want to de-risk or cash out in full, founders want to retire, or certain founders want to leave whilst others want to stay and build.
Our type of PE, lower mid-market, is not about using leverage to generate returns, it’s about providing solutions to founders’ needs. The current crisis and a prolonged downturn might require PE and founders to be more creative about deal structures, but the PE solutions will still be there.