What Do Our Current Client Assignments Signal About the Economy?
by Rob Carringer
CRP Managing Partner
One of the questions asked by our clients in industry, as well as our referral sources in banking and investing, is “What do you see in the economy?” Often we are engaged in interim management roles running company operations, so we do have some insight on how shipments have been and what has been happening to clients’ backlogs.
Lately, however, we have begun to look at the economy through the view of the specific engagements that our clients have tasked us to perform. Currently, CRP has twenty four active engagements with a handful of small wrap-up assignments at clients where we have completed all of the assigned work, with only some monitoring or reviewing remaining. A review of these engagements offers a microcosm of the current market and economy.
Most of our current work is process improvement or cost-reduction work. Sometimes this work is combined with an interim C-level assignment. Regardless of our specific role, CRP is able to boost the earnings of a client by focusing on operation, giving the client’s valuation an additional bump. For the many private equity firms and hedge funds who use CRP, this work provides healthy economic returns (especially now, as the valuation market right now seems to be north of 8x EBITDA).
| CRP Current Engagements |
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So, a $1MM increase in EBITDA pays back $8MM in equity value for a cost that is a fraction of that value. This type of assignment has been an increasing portion of the CRP workload over the past 12 – 18 months as our private equity clients and hedge fund clients seek to sell their investments.
Interim management work remains a strong part of CRP’s workload with 32% of our assignments falling into this category. Within those interim management assignments, 80% are interim CFO assignments with the remaining assignments split between CEO and CRO positions. Over the last two years, this ratio has flipped with interim CEO taking the lead. Just this past month, CRP was contacted about filling interim CFO roles in a half-dozen additional companies.
Another shift that is very evident is that bankruptcy work is now a smaller percentage of our overall assignments compared to a year ago. This situation has been echoed as we speak to bank workout groups and to bankruptcy attorneys. So, while we were excited to test out some of the new bankruptcy laws, we have found few opportunities to do so. This result is at the delight of our private equity clients who prefer to fix their investments out of court rather than dive into the Chapter 11 tank.
When we review where our revenue comes from relative to our number of assignments, it is interesting that the process improvement and cost reduction work generates a lower percentage of our firm’s revenue than the corresponding analysis on number of case assignments. This process improvement work seems to be a good deal for our clients especially when they receive an 8x multiple on the results we generate.
% Cases |
% Rev |
|
|---|---|---|
| Interim Mangagment | 32% | 41% |
| Process/Cost Improvement | 24% | 13% |
| Improvement Refinancing | 16% | 5% |
| Bankruptcy | 16% | 22% |
| Turnaround | 12% | 19% |
| 100% | 100% |
CRP typically combines some improvement work whenever faced with a refinancing assignment. This increases the number of lenders who will consider the credit. The refinancing work is a good bargain for our clients as we usually charge a regular hourly rate, saving our clients’ lots of fees when compared to a typical investment banking fee.
CRP participates in manufacturing, distribution, retail and restaurant industry segments, although we also look outside these areas for opportunities to serve our client base. Right now, our assignment portfolio is heavily weighted toward Retail. This is usually the case right after the holiday season ends. The rest of the industry segments switch places throughout the year as the client mix of project completions and starts changes.
| CRP Work by Industry Segments |
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Finally, what does our vantage point of this microcosm lead us to believe about the overall economy and market? First of all, our view indicates that equity owners from the private equity and hedge fund communities are seeking to boost their portfolio’s earning power in advance of selling their positions. The selling market remains hot and owners are eager to cash in on this demand.
Secondly, owners are seeking strong financial managers from our stable of turnaround professionals. Limited reliability of the financial reports and projections is probably one the highest complaints on the record about a client when we first become engaged in working with the client.
Additionally, refinancing and the associated improvement work remains a strong focus of the economy, as credit seems readily available even though most are concerned about a pending tightening credit squeeze.
Finally, out-of-court solutions are still preferred by equity owners more than a bankruptcy option. And lenders are willing to work with equity owners during this process as long as they are receiving what they would otherwise receive in a bankruptcy.
Rob Carringer is a Managing Partner with CRP.He can be reached at rcarringer@crpllc.net.
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