Given the state of the markets these days, I'm doing a lot of listening and learning and the comments from one of my best private equity clients continues to ring in my ears.  On a recent call with a partner of one of the world's largest and most successful private equity firms, I asked him about the mood and focus in his firm.  After some discussion of the magnitude of the financial crisis and the challenges we all face, he said, "Rob, none of us were fully prepared for this mess, but we tell ourselves to never let a good recession go to waste."

We all understand the concept, but it's helpful to remember the positive long term effects of cyclical downturns and recessions.  Success and growth are good and we're all hoping for good times ahead, but the realities of the moment require a reset based on reduced demand and the likelihood of relatively flat growth at best even when things do improve.  The partner went on the say, "No one can hold management accountable for the results in the 4th quarter, but they better reset the business based on that depressed demand for all of 2009."  There you have it; expectations are being set around the likelihood that the remainder of 2009 will be just as bad as the 4th quarter of 2008.

These are extremely difficult times, and much like our President seems to have learned there's no upside in trying to predict that the end of the recession will occur during the second half of the year.  "Prepare for the worst and hope for the best" should be the song of the day, and for those of us who are still in denial it's time to fully accept the challenge.  Before you assume that I'm suggesting a complete shift to full turnaround mode, another comment from my private equity client was telling.  He said, "The true measure of a CEO is whether he or she can still make important strategic investments while simultaneously rightsizing the ship."  

Leading your company through these turbulent times may be the biggest challenge you will ever face.  Having said this, better times will come and when they do our companies should be in terrific shape and focused for success.  Remember, "Never let a good recession go to waste."

How are you balancing the need to reset your business and make important strategic investments?  When do you think we'll see solid growth again?

  

As you might expect, I'm asked this question a lot.  With a tremendous amount of uncertainty out there and very little previous experience in charting the course during similar times, leaders are concerned.  The eternally optimistic look for daily signs that things might get better next quarter, and the overly pessimistic talk about the systemic problems that will likely persist for years.  Well, we're all in this together to some degree, and it seems to me that the most likely answer falls somewhere in between.

Trying to forecast when things will turnaround in the future is probably best done with an eye to the past.  In speaking with a group of C-level executives the other day, I took us back to last year and how the events unfolded to get a better sense of the trend line we can project.  We all know the story and all of us can think back to the moment last year when we realized this was not going to be just an ordinary recession.  A CEO told me of his epiphany when he was driving in his car coming home from the airport last spring.  He looked up and the ad on a billboard said, "Refinance your home at 110% of it's value".  He was smart enough to sell nearly all of his equities at the time, but each of us has a similar moment of awakening.

Sadly many of us didn't see this coming.  Our own experience was similar, but the ever increasing magnitude and realization of the problems began last February when all of the major financial institutions around the world began to record huge write-offs.  At the time, we had several potential searches in financial services entirely evaporate as the banks headed for the bomb shelter.  The next wave involved the private equity players who no longer could access the capital markets to leverage their deals, and this while sellers still didn't realize they're expectations for the valuations were incredibly unrealistic.  As a result, the equity guys tucked in their sails next.  Having said this, the corporate decision makers largely waited believing or hoping that this was somehow a financial crisis that could be contained.  After all, their businesses were productive and healthy.  But this optimism soon faded as well and Q4 washed everybody out.

I take us back to appreciate just how early we are in the cycle and the process of recovery.  The December rally driving the Dow to 9,000 reflected the short term expectations that things turnaround quickly.  The conventional wisdom even predicted a second half rebound which was reflected in the market.  But today with the Dow at 6,600 and falling, nearly everyone is expecting 2009 to be a wash and that a noticeable recovery may not happen until well into 2010.

In the face of constant bad news and uncertainty, I'm asked what we should look for as the signal that things are turning around for C-level hiring and I'd point to two things.  First, the private equity investors are waiting for the right time to invest.  When the M&A activity returns and investors feel confident in putting money to work, that is the first sign that we're clearly in the bottom and that the risks of missing out on a good investment outweigh the risks related to the uncertainty of when growth will return.  Secondly, CEO turnover will likely signal that individuals and companies are prepared to move on.  

Today, we are hunkering down and waiting, but when we gain better clarity on how to charge ahead executives will decide to leave and Boards will make changes.  These decisions tend to occur most often during Q2 and Q3, but it remains to be seen if this turnover will occur this year due to the expectation of an extended period of decline and certainly marginal growth at best.  Regardless of whether CEO turnover increases this year or next, it will likely be preceeded by an increase in M&A activity.  Seeing other companies making progress will then cause boards to lose patience and executives to decide the time is right to jump ship.  CEOs will then leave or be taken out, and the resulting activity in hiring and turnover will result in new opportunities across the market.  

Unfortunately, the answer to the question, "When will things turnaround?" is probably not what we want to hear.  The severity of the problems and the duration of the recession will likely push out the recovery until well into 2010.  While the signs of a turnaround will emerge even as unemployment continues to rise, C-level hiring will come back first and likely be linked to the increase of M&A activity and CEO turnover.  We'll all find out, but keep your eye on these two trends if you're looking for the silver lining and the signs of better times ahead.

What do you think?  Do you think unemployment will exceed 10%?  Do you see a recovery happening this year?