• Valedor Partners

Don't Just Stand There

Updated: Sep 2

Vanguard founder John Bogle famously espoused the inverse investment maxim, “Don't do something. Just stand there.” These may prove to be wise words for investors in today’s tumultuouspublic markets, but at Valedor we deal with owners and managers of operating businesses who would do well to ignore this advice in the face of potentially significant health consequences and economic disruption from the COVID-19 pandemic. In this Valedor Bulletin, Chief Scientist George Danner offers actionable advice for business owners and operators.


Introduction


COVID-19 is having a dramatic and chaotic impact on global markets. We recommend that our consulting clients and portfolio companies consider some or all of the following tactical

responses to help them endure the pandemic and thrive in the long-term:


SHORT TERM


Start scenario planning.

Companies need a means for stress-testing their economic and operational models against a large number of plausible scenarios. This includes extreme-conditions testing where perfectstorms of multiple events conspir e to create unprecedented situations. Valedor can create financial/operational and simulation models to

assist in the analysis of these scenarios and promote objective, data-driven conversation in the board room and C-suite.:


Evaluate supply chain vulnerabilities.

Particular attention must be paid to supply chains. Where are inventories? What orders are in the pipeline? Will there be parts/material shortages and if so where? How can insurance be created to mitigate these effects? Our

product SupplyBrain can help companies get immediate visibility around these questions.


Reduce Costs.

The intelligent reduction of non-labor cost drivers works no matter what conditions are present. Our models can help identify these drivers and the effect of streamlining operations while avoiding impairments to long-term growth.


Re-negotiate contracts.

Firms are often legally bound to perform under contracts with customers and suppliers. Force majeure allows parties to re-examine contracts and, where appropriate, to re-negotiate them in good faith, particularly by building optionality into contracts in light of the volatility that will be with us for at least the next 90 days. Valedor has extensive knowledge of

the Real Options Framework that allows us to valueoptionalit y in a systematic way, as in “How much is this clause worth to me?”


Shore up the balance sheet.

Allocate resources immediately to forecast future cash needs and available

credit to confront the increased odds of an extended economic downturn. This effort should closely follow the aforementioned scenario analysis and could encourage

de-levering, refinancing, or even borrowing more from existing credit lines. In light of the recent prevalence of covenant-lite financings, healthy banks and companies with hitherto strong relationships with their lenders should have the incentive and flexibility to work with

one another to ensure optimal outcomes.


LONG TERM


Diversify.

Many firms are disproportionately exposed to certain sectors that will be deeply affected by COVID-19. We can help enhance market agility to create near-term diversification while respecting commitments.


Automate.

Most firms have been automating processes intermittently in recent years. We recommend using the pressures caused by COVID-19 to accelerate those initiatives in ways large and small, surgically applying them to areas that provide the most leverage. Our recently published book on automation provides practical guidance on how to do this well.


George E. Danner

March 9, 2020

Disclaimer


This presentation is being furnished on a confidential basis to alimited number of investors for informational and discussion purposes only and does not constitute an offer to sell or a

solicitation to purchase any security. The information set forth herein does not purport to be complete and is subject to change. Investors should be aware that an investment in any transactionsdiscussed herein involves a high degree of r isk, including the potential complete loss of their entire investment.


This presentation does not constitute an offer or solicitation inany state or other jurisdiction to subscribe for or purchase any securities. Recipients of this presentation agree that Valedor

Partners LLC, a Delaware limited liability company (“Valedor”), its managers, partners, agents, affiliates, and assigns shall have no liability for any misstatement or omission of fact or any opinion expressed herein.


The information contained herein must be treated in a confidential manner and may not be reproduced, used, or disclosed, in wholeor in part, without the prior written consent of Valedor, and is not intended to be relied on as the basis for an investment decision.

Valedor, its managers, partners, agents, affiliates, and assigns make no representations or warranties whatsoever, nor are any such representations or warranties to be implied, concerning the accuracy, completeness, or correctness of the information supplied hereunder.


Calculations and economic illustrations presented herein are based on various assumptions, including forward-looking expectations, but Valedor, its managers, partners, agents,

affiliates, and assigns do not make any representations, warranties, or guarantees as to the future financial performance or the economic returns that any investor can expect. Certain

investments identified in this document have not yet closed, might close on different terms from those assumed, and/or are subject to factors that may affect Valedor’s willingness or ability to close these investments. As stated above, this document is not intended to be relied on as the basis for an investment decision.


In considering any performance data herein, each investor should bear in mind that past performance may not be indicative of future results, and there can be no assurance that unrealized investments will be realized at the valuations assumed as actual realized returns will depend, inter alia, on future operating results, the value of the assets, market conditions at the time of disposition, any related transaction costs, and the timing and manner of realization, all of which may differ from the assumptions on which the valuations contained herein are based.


Results herein may be subject to subsequent adjustment. Except where otherwise indicated, the information herein is based on matters as they exist as of the date of preparation of the

information (which might differ from the date of preparation of this document) and not as of any future date. Due to various risks and uncertainties, actual events or results or the actual performance of any investments discussed herein may differ materially from those reflected or contemplated in such forward-looking statements. The information in this presentation about prior investments and investment strategies is provided solely to illustrate investment experience. Prospective results included in this presentation may not take into account fees, costs, or other charges, and do not represent the results of actual investments.


An investor should consult its own attorney, business advisor, investment advisor, or tax advisor as to such matters concerning the information contained herein.


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