DATA SNAPSHOT: Firms prioritize managing cash and costs – EY report

Managing liquidity, working capital and costs initiatives are top operational issues for GPs’ portfolios.

Faced with extended hold periods for their portfolio companies, private equity sponsors are focusing on ways to manage working capital more efficiently and cut operational costs.

While firms are pulling all the value creation stops, today’s operating environment has placed high priority on liquidity, working capital and costs initiatives, according to EY’s Private Equity Pulse report for Q3 2023.

Eighty percent of the PE professionals surveyed said they’re paying more attention than usual to helping companies get visibility into cash and liquidity needs. As higher interest rates have varying impacts on companies, those that can generate relatively more cash are more resilient and can deploy that excess cash to fund acquisitions, repay debt, invest in talent or fund business transformation at a time when many of their competitors cannot.

To build the cash discipline and control needed in today’s markets, firms and portfolio companies must first “get a firm grip on cash,” the EY report said.

“While cashflow forecasts are a requirement for most businesses, they’re not always deployed effectively. A short-term direct cashflow forecast built from the bottom up, with a weekly cadence of variance analysis, reforecast and mitigation actions is most effective,” the report said.

To manage working capital more effectively, many PE-owned businesses have followed typical cash improvement methods such as extending supplier terms, running down old stock or factoring some of the debtor book, EY said.

Treasury teams can be a significant help in optimizing the liquid nature of the firm’s cash position through cash pooling, releasing trapped cash and flexible financing structures; and they can have strong visibility and control of credit covenants and regulations across jurisdictions.

Cutting costs is another area of focus, with 70 percent of firms saying they’re paying more attention to cost takeouts than usual. These firms said it is imperative to take a thoughtful approach that keeps costs under control while keeping growth drivers intact.

EY said in the survey that the ability to identify and execute the right cost optimization strategy can be an all-important differentiator in an adverse market environment. While most companies manage costs for stability, the most successful companies manage for both resilience and future growth.

Firms and portfolio companies need a “true understanding,” EY said, of the real cost drivers of the business, whether the business has the right competencies and mindset to rapidly deliver on genuine cost savings, and what costs should or could be to effectively serve the customer base and if that cost is sustainable.

Finally, firms must determine the scope, intensity and timing of cost initiatives, followed by a determination of the areas of the business that should be targeted for improvement.