Ever “carb-load”? I used to. “Carb-loading” is the process of consuming large quantities of carbohydrates which are stored as glycogen and subsequently burned while competing in an athletic event. Doing so made me feel sluggish. Do you know who else feels sluggish? Software companies that Private Equity owners have loaded with debt.
It’s difficult to focus on new product development, new product go-to-market strategies and revenue growth when your company is shouldering a heavy debt load. The focus tends to shift from “growth” mode to “maintenance” mode as executives invest less time thinking about long-term revenue growth and more time thinking about maximizing short-term EBITDA.
One modest growth Insurtech company that was in yesterday’s business news sported an 11x Debt/EBITDA multiple as recently as 18 months ago. Debt climbs quickly when you layer multiple debt-funded acquisitions on top of each other (so goes the private equity model). Good luck trying to ignite revenue growth from underneath that crushing debt load. However, portfolio company revenue growth is not Private Equity’s primary motivation. Maximizing short-term IRR is. Portfolio companies are being used to goose PE IRR performance while the companies themselves are being hollowed out. If only those companies could speak..
"We are the hollow companies We are the stuffed companies Leaning together Balance sheets filled with debt. Alas!... This is the way the world ends This is the way the world ends This is the way the world ends Not with revenue growth but a whimper" https://allpoetry.com/the-hollow-men