How to manage portfolio companies when the economy is down
May 2008
Strategies to Turn an Economic Slump to Portfolio Companies’ Advantage

Management summary


The current U.S. economic environment has profoundly hurt companies of all sizes and ownership structures. Rising raw material costs, driven by volatile commodity prices and rising supply chain costs, have crippled EBITDA margins. Adding to the pain, companies in many industries are struggling to maintain sales volume in the face of decreased downstream demand.


The private equity professional feels the downturn directly. Companies capitalized in an attractive environment are squeezed both on sales and on cost control, resulting in a reduced EBITDA margin and lower operating cash flow. The latter inhibits a company’s ability to service its debt and restricts re-investment of retained earnings in value creation initiatives. With a lowered EBITDA, valuation suffers and the ability for a private equity firm to make a profitable exit is threatened.

However, there are several strategies a private equity firm can initiate to achieve “quick wins” without a large capital expenditure.


In difficult economic times, many firms are reluctant to make large capital expenditures to overhaul the operations of portfolio companies. Often, implementing capital intensive or comprehensive improvement projects such as process automation, CRM, BPO, lean manufacturing or Six Sigma are put on the back burner until the operating cash flows return to acceptable levels.

In downturns, Arthur D. Little recommends private equity firms to focus on immediate impact and low capital expenditure projects such as overhead cost reduction, sourcing excellence and revenue optimization.


Arthur D. Little, the world’s first management consulting firm, has extensive experience and proven methodologies for scoping and implementing projects centered on protecting EBITDA margins and cushioning the impact of a difficult economic environment.

In challenging times it is crucial that a project’s impact is measured by the effect on EBITDA. By investing in EBITDA preservation projects, a portfolio company sets the foundation to survive the difficult times and emerge from the downturn better positioned in the marketplace, financially stronger and operationally smarter.