What a difference a couple of years can make. In early 2018, the confidence of CEOs of both private and public companies was sky high. Business leaders had seen the US economy receive a cash injection in the form of tax cuts, equity markets around the world were booming and there was little talk of trade wars. Fast-forward to today and it’s a very different story.
Confidence levels among CEOs, evidenced by PwC’s 23rd Annual Global CEO Survey, have plunged. In 2018, only 5% of the world’s CEOs believed that global economic growth was about to decline; the vast majority were optimistic. This year, the proportion of cautious CEOs has risen sharply to 53% — and private business CEOs mirror their gloom. And this was before the threat of a global public health emergency.
Although 27% of private business CEOs are very confident their companies will grow in the next 12 months and 32% expect their companies to grow in the next three years, only 23% believe economic growth will improve in the next 12 months.
Given the worldwide scale of geopolitical and economic uncertainty now, we can forgive private business CEOs their pessimism. But only for a moment, because the reality is that private businesses — unbound as they are to the short-termism of quarterly shareholder reports — can be in a better position than many public companies to weather what may be ahead. They can also be well placed to grab opportunities when they arise, provided they avoid becoming paralysed by the prospects of a slowdown. This opening will now have to be balanced by the unprecedented challenges and uncertainty in the coming months brought about by the spread of COVID-19.
Many leaders tend to take a defensive stance when faced with uncertainty — and that usually means cutting back on investment, freezing hiring or reducing headcount, and avoiding making any big decisions about the future. But this is a short-term response and private businesses don’t need to follow that playbook. What we learn from this year’s CEO survey data is that not all is doom and gloom among private business CEOs, particularly those who took on board the lessons of the 2008 global recession.
For example, during the financial crisis, in our experience working with private business CEOs, they showed admirable loyalty to their employees, with many using the time to upskill their workers. That was an investment that paid off — and it’s heartening to see today that 51% of CEOs of private businesses say they expect to increase headcount over the coming 12 months, compared with 46% of CEOs of listed companies.
Many private businesses also have stronger balance sheets today, making them more resilient in the face of an economic slowdown. When banks, their primary source of finance, cut back on lending after the 2008 crisis, private businesses adapted quickly, focusing on building their capital reserves. One of the consequences is that equity ratios among private businesses have increased steadily since 2008.
One striking finding of the CEO survey is that leaders of private equity–backed businesses tend to be more confident than others: 33%, compared with 27% of private business in general, say they are “very confident” of their company achieving revenue growth in the coming year, while 36% (compared with 32% of all private companies) are “very confident” of growth over three years.
It’s true more private businesses have been prepared to consider private equity (PE) as an alternative source of funding since the financial crisis. According to PwC's latest Family Business Survey, for example, more than a third of family business leaders would consider private equity. But whether or not private companies choose this route, they can certainly glean important tips from PE-backed businesses.
The first is a strong focus on operational performance and cash management. A study that compared the performance of more than 700 PE-backed businesses with a set of relevant but non-PE-backed peers found that the PE portfolio companies earned 8% higher market share during the financial crisis and attracted around 6% more investments in the years following it.
Second, perhaps more than other private businesses, PE houses push their portfolio companies to take planning seriously — they want to know what’s changing, what could change and how that might affect the business. Scenario planning is an important capability during uncertain times, and the data and technology are available to help build an agile and resilient strategy.
And, finally, PE houses see a downturn not as a crisis to be managed, but as the ideal opportunity to invest, consolidate and look for new opportunities. Any private business that takes heed of these lessons will be better placed to weather uncertainty.
There’s a great deal of truth to the adage 'never waste a crisis' — or, in this case, a slowdown. Private businesses are far better prepared to gain from uncertainty than they were a decade ago. They are stronger, have learned from experience and have a clearer view of their advantages — their focus on values, purpose and loyalty toward employees has proved to be an important asset. These strengths will be tested by the current public health emergency and its economic implications, but private businesses are well aware of the value of good workforce relations. Our 2018 Family Business Survey reported that 84% of businesses that were delivering 10% or more in annual growth said they have a clear sense of agreed-upon values and purpose, compared with 76% of those with slower growth who did not agree to having a clear sense of values and purpose.
Our advice is to scope out opportunities and be ready to act. CEOs of private businesses are well placed to seek growth by deals or opportunities for significant capital investments to improve productivity. Chief financial officers and chief operating officers can support this by focusing on operational performance, cash management and scenario planning — to help create a company that’s resilient, agile and open to an array of options. Our strategy for achieving this is described as the Fit for Growth methodology.
Today’s uncertainty can be a time for optimism and courage, and for decisive action, for those who are well prepared. Private businesses can use time as a competitive advantage: they have the liberty to focus on the longer term.
Dr. Peter Bartels
Global Entrepreneurial & Private Business Leader, Partner, PwC Germany