Using Data to Combat Operational Uncertainty
How did COVID-19 affect manufacturing businesses, and what lessons did investors learn from the crisis? A year after the coronavirus shut down most of the United States and swept the globe, Axial’s Middle Market Review reached out to Ken Hoefling, an Operating Partner at LFM Capital and former Vice President at Caterpillar, to discuss COVID’s impact on lower middle market manufacturing, business continuity planning in times of crisis, the critical role of good data within a business, and more.
MMR: What impact did COVID-19 have on manufacturing companies and LFM’s portfolio in particular?
Ken: The United States has a diverse manufacturing industry — some companies grew and benefited during the crisis, and some had their industries decimated. This spread was just as evident in LFM’s portfolio. And while the government stimulus money was critical for many manufacturing businesses, providing much-needed liquidity, only a few of our companies were eligible for the funds.
If my experience at Caterpillar during the 2008 financial crisis taught me anything, it’s that problems are always going to crop up — what differentiates you is how you respond. In a time of distress, structure is key. Our focus at LFM was on facilitating honest conversations with the leadership teams at our portfolio companies to help them take quick action and remain as strong and resilient as possible in light of the circumstances.
MMR: What concrete strategies came out of those conversations?
Ken: At the beginning of the crisis, we created a portfolio-wide Business Continuity Plan (BCP), based on what our management teams were experiencing across the country. We conceived and implemented the plan at one company for four weeks, which enabled us to pressure-test it and work out any issues. We made necessary adjustments and then rolled out the plan across the rest of our portfolio. Our BCP narrowed in on three critical metrics: sales, cash flow, and cost structure. We then put together three forecasts for each metric — a best-case scenario, a middle-of-the-road scenario, and a worst-case scenario — to ensure we were prepared for whatever came our way.
MMR: How do you approach decision-making in such uncertain times?
Ken: I started my career in engineering analytics and believe firmly that to be the best leader, you need to have the best data. Better data gives you an increased probability of making better decisions. This is true at any time but even more relevant today given the market’s unpredictability. At LFM, we make good use of cutting edge data visualization tools to provide our decision-makers with near-time data. Investing in data analytics allows leaders to measure and present KPIs in an easily digestible format, so they can achieve consistency and work from a single version of the truth. Rather than spending time collecting and organizing data, you can see what the data is telling you and take action. Being deliberate about what metrics you’re measuring is crucial to success. We have to stay engaged with our business analytics tools and periodically course-correct to keep KPIs in line with overall strategy.
MMR: Are there any other lessons you’ve learned from the pandemic?
Ken: Never let a crisis go to waste. This is a lesson I’ve learned over and over in my career, and COVID is no exception. For example, Fecon, one of our portfolio companies, re-envisioned how they approached marketing and social media as a result of the pandemic. For another, J&E Precision, which was an essential business, had to get creative to keep operators safe and multiple shifts running. Finally, in multiple portfolio companies, what started as a closer look at cost structure resulted in new and improved initiatives that would have otherwise been discovered. Many of these initiatives will stay in place and continue to create value long after COVID-19.
About LFM Capital
LFM Capital is a private equity firm based in Nashville, Tennessee. The LFM team is led by experienced and successful Fortune 50 global executive managers and private equity professionals who bring decades of management leadership, operating best practices, exceptional professional recruiting networks, and a successful track record in lower middle market investing. LFM targets lead or control investments in U.S.-based lower middle market manufacturing and industrial services companies with at least $3 million of EBITDA and enterprise values ranging from $15 million to $125 million. The firm’s mission is to partner with portfolio company management to develop and build world-class operations through a combination of manufacturing and operations excellence and targeted growth and expansion strategies. For additional information, visit www.lfmcapital.com.