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The glory days of the Private Equity (PE) world are certainly not over but they are changing. Firms today are struggling to attract new investments and to manage the portfolio companies they own.
The days of the quick buy and sell are long gone. The PE firms today are faced with attempting to figure out how to build value not through financial engineering but old fashion efficiencies and growth. Today’s economy has made most companies focus on the way they operate and gain efficiencies in buying, selling and managing cash flows. Sounds pretty basic but today those principals are the driving factors in where the portfolio companies need to be. With cash inflows slowing the firms are forced to make difficult decisions on where to invest the capital. The portfolio companies may not have the resources to go it alone.
The larger PE firms are beginning to look at how they can leverage their size to benefit all of their member firms. In the past, PE was about buy and sell. Today it’s about creating value by making the portfolio more efficient at the basics. A number of PE firms see this and are reaching out to consolidate the buying power of the member companies and source common commodities. This is not a novel idea but one of the many efforts going on today. Will we begin to see large PE firms bringing on Chief Procurement Officers or other cross operational positions to help better manage the portfolio of companies. I believe this has already started and based on the current economic outlook expect it to accelerate.
Paul Melchiorre is Vice President of Commercial Services Management at Ariba.
***Also posted on Ariba Exchange***
2 responses so far ↓
1 Igor Zax // Aug 28, 2010 at 4:18 am
The idea is obviously not new and historically PE houses tend to resist it (I was involved in a number of such discussions over years). Their main arguments where:
-General procurement was a small part of a spend, not many companies with similar business – so it is difficult to achieve substantial volume synergy as most of the products purchased are company specific,
-Private equity tried to maintain management independence (supported by incentive structures) of portfolio companies – while they can offer some high level advice from operating partners, they are reluctant to remove key functions from company management
-Unlike corporations where different divisions suppose to be there for long time, PE investors only expect to hold companies for relatively short period
Although all these arguments have a lot of rationale behind them, there are strong reasons to believe that procurement consolidation is the way forward:
- Procurement consolidation not only allow to extract volume discounts (that would only be applicable to common commodities), but also substantial process synergy (the argument was explored many time within corporate in discussion whether procurement need to be done by business unit/project managers or specialised procurement function- consensus seems to be the latter is more efficient)…
- There are significant financing (see my article in Private Equity News http://www.tenzor.co.uk/wp-content/uploads/2009/05/mind-the-chain-lessons-for-firms-in-distressed-markets.pdf ) and tax advantages in appropriately structured procurement company for the group
- There are multiple ways of aligning incentives so that such structure would not distort them
- If procurement centre operates its own P&L in a way that it is making profit AND increasing profitability of portfolio companies, there is no reason not to continue providing services to portfolio companies once they are sold (unless the buyer has a better way). So for PE company it achieves both higher sale price (base on a multiple of a higher earnings of the company sold) and source of ongoing revenue for procurement centre (this also allows to achieve larger savings as over time they relate not only to current portfolio, but also “community” of formerly owned companies.
My view is that PE community start to wake up to these and other synergies to be achieved on portfolio level and we would see this as a mainstream trend in the near future.
2 Supply Chain Management Doctor // Sep 2, 2010 at 8:16 pm
Running a SaaS supply chain solutions business I can vouch first hand that the days of PE are certainly not dead. At least once a week we have interest from a different PE firm, claiming to be very interested in cloud computing based supply chain management software vendors.
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