Indonesia’s 2020 deal value dropped 40 percent from 2019 and 34 percent compared with the previous five-year average. By contrast, private equity investors pushed deal value across the Asia-Pacific region to a record US$185 billion, up 19 percent over 2019, buoyed especially by activity in China—the only country in the Asia-Pacific region to avoid a drop in 2020 gross domestic product.

COVID-19 disruptions and the economic crisis of 2020 sounded a wake-up call for investors. Many general partners discovered in the midst of the pandemic that their portfolios weren’t sufficiently prepared to withstand and recover from sudden shocks. Adding to the dilemma, a decades-long fixation on efficiency has steadily increased risk. And around the world, trade wars, plunging oil prices, and financial crises have hit many companies harder than executives imagined possible.

As decades of relative global stability give way to a new, more turbulent era, leading funds are reviewing their exposure to a range of risks and investing to increase the resilience of their portfolio companies. Bain & Company research shows more than 60 percent of general partners investing in the Asia-Pacific region say they’re willing to invest at least 5 percent of a portfolio company’s short-term profit to build long-term resilience.

A few leading companies that were ahead of the trend highlight what a difference resilience can make in coping with external shocks. Indonesia’s PT BFI Finance, one of the country’s largest independent consumer credit companies, weathered the COVID-19 lockdowns better than many of its peers. The reason: A year earlier, the company’s management, backed by investors TPG Capital and Northstar, had embarked on a plan to strengthen the company’s strategic and organizational resilience.

One particularly effective measure improved loan collection by using a call-center collection agency to supplement field collectors’ efforts. These “telecollectors” helped the finance group reach out early to creditors who risked defaulting and, in some cases, avoid nonperforming loans. During the pandemic lockdowns, the remote-collection strategy offered a safe and vital alternative to in-person collection, allowing the company to minimize defaults.

Despite widespread economic disruption caused by lockdowns, the group’s nonperforming loans declined during the pandemic. In September 2020, nonperforming loans declined to 2.7 percent for total financial assets, down from 3.7 percent in June—and significantly lower than the market average of 5.2 percent.

Many companies, however, were caught off guard by COVID-19. The majority of general partners we surveyed (58 percent) say their portfolios proved to be only somewhat resilient or not really resilient during the COVID-19 shock. One-third say they lack the specific tools to assess the resilience of a target. Close to one-third say their portfolio companies are still in the experimental or even earlier stages of building resilience capabilities into their strategy and operations.

By their nature, risks are moving targets, so building resilience requires a long-term effort and focus. But the benefits are significant: Improving a company’s resilience can almost double its chances of survival and improve cost-effectiveness over time. Many business leaders make the mistake of assuming that resilience is all about shoring up the balance sheet. They focus on the risks associated with leverage and liquidity, but ignore other potential sources of fragility.

Successful leadership teams take a holistic view of resilience. That means identifying every kind of external event that can affect the business. They also consider simultaneous events across multiple channels that could compound the extent of a shock. A broader, more encompassing view of both risk and resilience allows leadership teams to make smarter choices about where to invest limited resources to protect the company from future shocks.

In fact, resilience spans five dimensions: strategic, financial, operational, technological, and organizational. Strategic resilience, for example, includes revenue and profit diversification, relative market share, and demand elasticity. Operational resilience includes supplier concentration and redundancy.

Companies may be able to address some risk factors quickly and inexpensively, but an effective approach to building resilience usually requires investment and opportunity cost. The key is striking the right balance between managing risk and value creation. Leaders begin by analyzing their exposure. They determine how much stress the company can absorb and the fund’s willingness to trade off short-term profitability for long-term resilience.

Asia-Pacific general partners cite three areas of portfolio risk that they worry about most: competitive position, balance-sheet risk, and organizational agility. Addressing these risks may require more investment. General partners rate other categories of risk such as portfolio concentration, operational leverage, and cybersecurity as less difficult to tackle.

Resilience is a strategic issue. Investors and senior managers need to be involved, because decisions to build resilience involve difficult choices. Baring Private Equity Asia helped HCP Packaging Group, a global leader in the design and manufacture of cosmetics and skincare, build resilience by backing a plan to add new production sites and diversify its customer base. Those moves made a big difference when the US-China trade war hit global supply chains and when COVID-19 struck.

HCP started investing in 2018 to expand its international manufacturing footprint beyond China and North America, with production acquisitions in France and Germany. When the China–US trade war broke out, HCP quickly shifted part of its China production to other countries. Similarly, as COVID-19 lockdowns began, HCP was able to make the most of its expanded manufacturing footprint and supply chain flexibility, outmaneuvering the competition.

Leading fund managers and executive teams seeking to strengthen resilience make sure they tackle the no-regrets actions first—those with minimal impact on profitability. But they also understand that significantly reducing risk entails investment and opportunity cost.

Developing the right level and type of resilience for a portfolio company demands a combination of short-term actions and long-term vision and alignment with the executive team.

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Usman Akhtar and Soegeng Wibowo are Bain & Company partners based in Singapore and Jakarta respectively.

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