Organizational effectiveness drives value in tough times

According to the most recent federal statistics, business bankruptcy filings surged by 33% in the US between September 2023 and September 2024. Elevated debt, higher supplier costs, coupled with covid money running out and less private equity funding have been underlying drivers of the squeeze. Burning through cash is no longer an option. Self-funded growth through higher profits is the new reality. On-top of this, greater agility is needed to react to current market uncertainties.

A portfolio company’s ability to navigate these challenges is tied to its collective agility – the ability to connect-the-dots, make the right decisions and implement them before competitors.

The stakes are high—the difference between thriving in a turbulent market or facing significant losses boils down to organizational effectiveness.

Mitigating business risks through organizational effectiveness
The surge in bankruptcies among PE-backed firms is a glaring signal: high leverage is no longer sustainable. Portfolio companies must be operationally sound to weather economic turbulence. Organizational effectiveness plays a pivotal role here. It enables companies to:

• identify inefficiencies and streamline processes, reducing the cost base,
• develop robust decision-making frameworks that respond dynamically to market changes,
• foster a culture of accountability to ensure execution aligns with strategic priorities.

By embedding good governance at every level in a portco, funds can safeguard investments and minimize exposure to downside risks.

Overcoming macro-economic and supply chain disruptions through resilience
Supply chain disruptions are testing the resilience of PE-backed firms. Addressing this challenge requires more than technical fixes—it demands a coordinated effort across functions. Effective organizations foster resilience by:

• developing cross-functional collaboration to anticipate and solve bottlenecks,
• investing in talent development to ensure teams have the skills to adapt to unforeseen challenges, and
• establishing agile decision-making processes to pivot quickly when disruptions occur.

These capabilities don’t arise organically; they require intentional design and consistent reinforcement. Firms that can operationalize resilience enjoy a significant competitive advantage.

Winning in a competitive deal environment
Stubbornly high valuations, fierce competition for deals and longer hold periods mean PE firms need to create value through operational improvements underpinned by organizational transformation. High-performing portfolio company organizations:

• unlock growth by executing strategies more effectively than competitors,
• drive innovation by fostering an environment where creativity thrives, and
• retain top talent, ensuring long-term continuity and stability.

High-performing organizations are built through intentional alignment—from strategy to structure to culture. PE firms that focus on these elements consistently outperform.

Future-proofing against complexity and uncertainty
The complexity of current markets—from inflation to geopolitical uncertainty—require highly agile organizations that can adapt quickly. These operating models rely on:

• empowered leadership – delegated decision-making to reduce delays, bottlenecks and asymmetric information problems,
• metrics that matter – leading indicators aligned with value creation help teams prioritize, and
• feedback loops – continuous improvement mechanisms ensure strategies evolve with market conditions.

The most effective organizations not only survive complexity, but thrive in it.

Conclusion: The imperative for private equity
Organizational effectiveness is not a “nice-to-have”—it is a strategic imperative in private equity. Addressing today’s pressing challenges demands more than financial acumen; it requires strategic foresight, cultural alignment and operational execution.

Fund managers that prioritize organizational effectiveness are better positioned to:

• mitigate risks in their portfolios,
• enhance the value of their investments, and
• deliver superior returns to their investors.

In a world of uncertainty, organizational effectiveness is the lever that transforms potential into performance. For private equity, the time to act is now.