Debt Problems on the Horizon
Conventional wisdom is that loose credit is fueling the buyout boom. Dealogic reports that there have been more than $72 billion of buyouts for less than $1 billion. Some of these will have debt problems. We don’t know how many, we don’t know when, and we don’t know how severe the debt problems will be.
The Manifestation of Debt Problems
We do know a few things, based on our experience. For many companies that have debt problems:
Operating metrics will give early warning signals, before these signals appear in financial metrics.
- Many boards and management teams will either not be tracking these metrics, or not be acting on them early enough.
- Companies will avoid making changes now, for a variety of reasons. It will be costly and unpleasant when the lenders force these changes under different circumstances.
Our experience also tells us that taking action now can put operating companies in a better position to weather the future:
- “Lean” companies are more agile in responding to market changes. The companies that are investing to become Lean now will be better prepared to face a tougher market.
- Companies that execute quickly (e.g., complete a cost reduction project in 6 months instead of 12 months) will have an edge.
The ProAction Group helps private equity firms build stronger, more profitable portfolio companies. We help to create companies that outperform in tough times and avoid drastic turnaround measures forced by debt holders.