This article was co-authored by Ben Gaster, Director, Operations M&A, KPMG in Canada
In the hunt for value, size can be an advantage. Corporate organizations will often leverage their scale to embed cost-saving synergies or gain a procurement edge, yet the strategy is not as common among private equity (PE) funds. The question is often whether or not PE funds are even in a position to consolidate costs and create synergies across their portfolio and – perhaps, more importantly – if the payoff justifies the effort and potential disruptions?
The short answer is 'yes', but it can be difficult to crack the code.
That is not to say it is not being done. There are examples of PE funds that have succeeded in capturing value for their funds by identifying synergies across their portfolio of assets. Take working capital as one example. We know of one global investment firm that has deployed tools and techniques in a harmonized, systematic way across their portfolio to push working capital down across receivables, payables, and inventory. They implemented tried and tested techniques to minimize their working capital, and did so by hiring advisors to embed best practices across their portfolio. Momentum of this approach is building, with others applying a similar approach to cyber security, financial reporting as well as direct and indirect procurement.
One sure way to generate savings in procurement is to aggregate spend. If total indirect spend across a broad portfolio can be up to 5 percent of revenue; one can see merit in consolidating procurement when it comes to sourcing travel, hotels, IT expenses, mobile services, temporary labour, and other outsourced services (e.g. auditing, payroll, maintenance, etc.). Imagine the purchasing power of bringing $100M worth of business to one insurance provider, or working with one industry retailer to provide safety boots for an entire portfolio's manufacturing companies?
As with any cost-saving measure, there are several barriers to implementation. On one side, management prefers to have as little meddling as possible from their PE owners. They want freedom over their buying decisions and are likely to resist a PE fund's efforts to assume that buying power. On the other, there are too few success stories for PE funds to draw on to convince management it is worth pursuing. Skepticism over the true power of a centralized 'buying club' can run high.
The longer answer, then, is that leveraging scale to extract higher value from a PE portfolio is viable, but it is not as simple as flicking a switch. Smart PEs will find ways to overcome the barriers; perhaps by outsourcing the task to a procurement specialist, incentivizing management to let the PE fund assume control of the buying function, or both. Whatever the strategy, PE funds would do well to consistently track the savings and operational efficiencies that arise as a result of these initiatives to demonstrate their value and keep all stakeholders aligned.
With some introspection and a healthy dose of collaboration, it is possible to use a PE fund's buying power to its advantage. And, considering there is a compelling case for consolidating spends and standard functions, this is one strategy that is definitely worth sizing up.
And when you are ready,
Let's do this.