How Portfolio Companies Adapt in a Recession

By: Gridline Team | Published: 11/22/2022
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Short runways, tight budgets, and an uncertain future. That’s the landscape for many portfolio companies during a recession, and Bloomberg analysts predict there’s a 100% chance one will hit in 2023.

However, as any private market investor knows, there is also an opportunity when there is a crisis. Active fund managers can position themselves to capitalize on companies that shift tactics during a downturn and to help their portfolio companies outperform the competition.

In the early stages of a recession, CEOs batten down the hatches. They often make layoffs, cut costs, and optimize their businesses for the new economic reality. Some companies will try to secure additional funding, while others will pivot to new business models. And unfortunately, some marginal players will shut down altogether. But as the recession drags on, a new class of startups will emerge, focusing on profitability rather than growth at all costs.

Preparing for a downturn

The unprecedented 14-year bull market has lulled many investors into a false sense that “stocks only go up.” Many private companies also engaged in excessive risk-taking, assuming they would always be able to raise money at ever-higher valuations.

CEOs are rolling up their sleeves to get their companies’ houses in order. They are developing new strategies for revenue and cost cutting, and they are rethinking their business models. Meta recently laid off 11,000 people, while Twitter eliminated over half its workforce. These firms are not alone, with 50% of employers expecting layoffs.

Some companies are trying to take advantage of the situation by acquiring other businesses at bargain prices. A KPMG survey of CEOs found that 89% plan to make acquisitions over the next three years. M&A is a key growth opportunity in recessions, as firms that can acquire companies in downturns have historically outperformed the market by 7%.

Further, 78% of CEOs are aggressively investing in digital strategies to secure first-mover or fast-follower status, according to the KPMG survey. This is a significant move, as businesses that embrace digital transformation outperform their peers.

A new class of startups emerges

Meanwhile, a new breed of startups emerges out of any downturn. As today’s downturn has yet to fully play out, it isn’t easy to know precisely what form these new companies will take. We can, however, look back at previous recessions to get a sense of what to expect.

In the early-2000s dot-com crash, many “pets.com” type companies with unproven business models collapsed. But a number of new startups, such as Amazon and eBay, rose to prominence. Similarly, in the 2008 financial crisis, we saw the rise of “sharing economy” companies like Airbnb and Uber.

This year, we’ve seen several retail bankruptcies as consumer spending and confidence show weakness. Retail technology startups are springing up to help brick-and-mortar businesses win against the e-commerce juggernaut. For instance, Swiftly Systems recently raised another $100 million to become a unicorn, helping physical stores grow their online presence.

Swiftly is no exception, as VCs still have record dry powder and are continuing to raise eye-popping significant funds to invest in the next generation of startups.

Investors with a long-term view don’t view today’s market conditions as a time to pull back. Instead, they see opportunities to build positions in great companies that will emerge from the downturn as more vital than ever. 

With Gridline, you can access a curated selection of professionally managed alternative investment funds and gain diversified exposure to non-public assets with lower capital minimums, fees, and greater liquidity.

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