How CFOs are readying for a downturn

With a market correction on the horizon, CFOs are prepping their firms and fund portfolios to weather the storm.

Most US chief financial officers believe a recession will arrive in the next two years, according to a survey by Duke University late last year.

“I think we [CFOs] wake up every morning and we’re already preparing for the downturn,” one CFO told pfm. We asked some CFOs at Private Equity International’s CFOs & COOs Forum 2019 in New York how they are preparing for the inevitable.

Look for indicators

Look at your portfolio companies across all industries and geographies to find out where there might be exposures and risk concentrations. Look for patterns and trends that can help you look not just backwards but “around the corner”, one CFO advised.

“What you will find is in a downturn, the macro forces can overwhelm the micro forces and you’ll find out your portfolio can behave in a certain way and you want to anticipate that,” the CFO said.

Buy the right companies now

It’s also key for firms to make smart investments in anticipation for what’s to come. “The best way to prepare for [a recession] is to invest in businesses that are somewhat resistant to downturns,” another CFO said. “It’s almost like you have to address it at the time you make your investment in a portfolio company by choosing the type of business you invest in.”

Hedge the risks wisely

Isolate what risks in the market will exist in the future and hedge against them, one CFO said. “Most CFOs and private equity firms in particular, including ours, are very much focused on protecting the capital that we have at stake and creating effective hedges in place will help protect you against that as long as you look far enough into the future.” The CFO listed risks such as interest rates, oil price and currency as ones to keep an eye on.

Rely on outsourcing

Outsourcing is a big part of the private equity industry. It’s not uncommon to find firms that outsource their legal, IT, fund administration and various other functions. One CFO considers outsourcing a good way to manage staff during a downturn. “One practical rule a CFO can play is have more outsourcers and outsourced agreements,” the CFO said. “With an outsourcer you can scale up and scale down depending on downturns in the economy while you’re not cutting staff.”

Use a slowdown to get ahead

Use the downturn as an opportunity to focus on technology and perfecting back office processes as investing slows down during tougher economic times, one CFO said. “Sometimes when you’re so busy in the growth periods you don’t have time to fix everything in the back office and you’re kind of just running at full speed, so downturns are always a good time to look forward to organizing and getting ready for the next upswing,” the CFO said.

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