Abstract
Distressed investments form a special investment class. Investors source the investment cases from the credit portfolios of banks and private equity firms. They usually form task forces for the assessment, emergency management, investment decision, and turnaround phases of these investments.
This article focuses on distressed companies, particularly on the interactions among existing and new actors during the lifecycle of an investment decision. It explores the dynamics during the initialization of the project to bring the company back to growth and profitability. The first part describes how existing actors, in the initial situation, struggle to make the organization survive. In the second part, potential new investors introduce a project manager (PM) to assess the situation, to regain control, and to build the basis for the renewal process. The PM’s instruments and management skill are explored in order to show how they allow the dynamics of the system to influence the situation and achieve the objectives.
During its struggle to survive, the organization, i.e., the system, gains significant dynamics. The power shifts and changes in the positive loops can either push the system into an out-of-control state or, alternatively, propel it onto new levels of innovation, customer service, and profitability. This paper explores how the PM can increase his odds of bringing the organization back to growth and profitability by using a system-dynamics approach, drawing on both the author’s SD training and his repeated experience as a Project Manager.
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Notes
- 1.
Turnaround Management Association (www.turnaround.org), claims to have 9,000 members organized in 48 chapters in the U.S.A. and worldwide.
- 2.
- 3.
One exemplary loop “Top Management attention is diverted” is shown in Fig. 10.2.
- 4.
For a detailed discussion of different legal issues in restructuring cases under Swiss legislation, see Roberto (2003).
- 5.
In distressed companies, financial & management accounting is usually not state-of-the-art, as key people have left the company in previous restructuring rounds and new MIS-systems were not a priority in past years.
- 6.
Limits include that the investor cannot wait too long without risking significant or even total direct or indirect damage to the asset. A direct damage is when contractual penalties are triggered with customers or banks; a good example for an indirect damage is a hit at the company’s reputation, which can backfire with important customers and suppliers. This can be worse and more expensive to fix than a direct hit, which is quantified and can be renegotiated. Furthermore, media or public pressure or entrepreneurial responsibility brings in limits to the investor’s power over the company.
- 7.
Generally, and depending on the experience of its management, a company can go a long way with negative working capital. Very often key suppliers and customers can be convinced to co-operate, even when investors have not yet confirmed any bridge financing. However, waiting too long damages the company value, i.e., more funds are required to recover from a hit compared to a bridge loan that is at risk and may be lost in an unsuccessful turnaround.
- 8.
In a holistic way as promoted by Schwaninger 1994.
- 9.
In an extended form, these scenarios can be sliced, diced, and observed from different perspectives, e.g. as an employee, a team leader, a director, a team, a third-party service provider dealing with a client organization as well as the individual contact person.
- 10.
Investment Decision and Funding is the critical milestone for saving the company. It requires enormous efforts by financial, legal, and tax experts plus endless negotiations among shareholders, banks, and other stakeholders. The discussion of this work package and the Implementation of the Turnaround Plan would exceed the scope of this contribution, and thus is not dealt with in this article. There is a wide pool of literature, however, providing both concepts and case studies: examples can be found in Buth and Hermann 2009 or Concentro 2010.
- 11.
Validation of the lead list is a critical step, because such a list is often inflated to show good prospects for revenue and cash-flows, and to lure inexperienced investors in. Validation of the lead list is difficult, as information sticks with the sales force and with the existing or potential customers. By nature, sales representatives are good at selling things; they are keenly and quickly sensitive to what the customer wants, and therefore to what an unwary Project Manager might want to hear.
- 12.
Regarding analytical skills, simple, pragmatic instruments such as an Eisenhower matrix serve best to boil all issues down to the really urgent and important ones. Knowing which key supplier or key customer is most urgent to meet is key. Often, those who make the loudest noises are not the ones to deal with first. Rather, the risk is that the really key ones are quiet and pursuing their strategy of pulling out with a minimum of damage. The same applies to employees.
- 13.
Distressed companies have a long history of disappointing useful people at one time or another. The probability of getting valuable hints from one of them, e.g., about a fraudulent incident, can be well camouflaged, much as this unpretentious and simple footnote may conceal a bombshell. To be considered at the same time, such hints can also be faked either to damage somebody’s reputation or to divert attention.
- 14.
Analogies and metaphors are commonly used; in the author’s opinion, these can develop enormous power. The expression “Stop the bleeding fast” was repeatedly and with emphasis used by Prof. Haeberle in a Turnaround Management class at the Indiana University in 1994. It means stopping any cash outflow and guarding liquidity.
- 15.
Well-known turnaround managers with a reputation have an effect on the system when their names are mentioned. Today, however, unknown people are ‘googled,’ and discussions start immediately. However, in the second case, the author believes that this avenue of connection to a PM leaves no strong mark on the project lifecycle.
- 16.
At least at the beginning, the PM is accompanied and thus supervised by members of the management when walking around to meet staff. Only after some time is it possible to open this information channel. At times, the PM gets contacted by employees claiming to have important information. This is always a tricky issue, as meeting the person brings along new problems, whereas not meeting bears the risk of really losing a great opportunity to learn about an important issue, e.g., fraudulent actions or ghost projects.
- 17.
Segmenting the recipient groups with regard to the details they receive does not contradict an open-communication policy.
References
Buberl T, Heucher M (2001) In: Grünbichler A (ed) Anlagekategorie private equity – distressed companies. Verlag NZZ, Zürich
Buth AK, Hermanns M (2009) Restrukturierung, sanierung, insolvenz. Verlag C.H. Beck, München
Concentro (2010) In: Concentro Management AG (ed) Concentro turnaround investment guide. Finanzierung in der Unternehmenskrise 2010. Concentro Management AG, München
Preqin (2011) Preqin special report: distressed private equity. Preqin, New York
Roberto V (2003) Sanierung der AG. Ausgewählte Rechtsfragen für die Unternehmenspraxis, 2nd edn, Schriften zum neuen Aktienrecht. Schulthess, Zürich/Basel/Genf
Schwaninger M (1994) Managementsysteme, St. Galler Management-Konzept; Bd. 4. Campus Verlag, Frankfurt/New York
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Fuchs, M. (2012). System Dynamics in Distressed Investments: Power and Limitations from the Perspective of a Project Manager. In: Grösser, S., Zeier, R. (eds) Systemic Management for Intelligent Organizations. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-29244-6_10
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