Procurement’s strategic role in private equity investment value creation

Mike Lander Blog, Private Equity

The era is long gone when Private Equity was heavily reliant on financial engineering to generate the necessary returns from their portfolio investments. Over the last decade, financial market dynamics have meant that PE firms need to focus increasingly on improving the operational efficiencies of the underlying assets to generate the required returns.

This in turn has seen an increasingly important role being placed on the PE portfolio executives at all the leading private equity houses. The remit and expectations of these people is extensive and the teams are often small, relying on one or two individuals to cover a wide portfolio of investments. One area of focus to deliver sustainable EBITDA improvement is the review of third party spend, which can represent between 25% and in extreme cases 70% of sales.

Therefore, given that addressing other areas of cost such as employees is highly sensitive and often extremely risky, Executives of the Portfolio companies are strongly encouraged to look at Procurement with fresh eyes to identify EBITDA improvement opportunities . The challenge is that this is often laid at the feet of CFOs who, having just partnered with a new investor with stretching growth targets, find their day job full without trying to identify and deliver additional savings targets.

Over the last few years, 4C has worked on many EBITDA improvement programs for Private Equity owned companies. These programs are based on leveraging strategic sourcing principles to attain accelerated, yet sustainable, high impact on the bottom line of these companies.

Whilst the level of impact that these programs deliver is dependent on the current level of procurement maturity of the business, in a recent portfolio company survey conducted by 4C, it was evident that a significant number of portfolio companies across PE houses (primarily small to mid-size assets) do not have an established procurement capability. This suggests that EBITDA improvement opportunities through procurement are more available than people anticipate.

Even if there is an already established Procurement department, entry of a Private Equity owner is good news as Portfolio optimization teams typically raise the profile of Procurement at the company board and serve as an effective facilitator across the various members of the Management team. This usually enables greater cross-functional alignment and in turn underpins successful delivery and is a key driver of improved outcomes for the business.

In a climate of (anticipated) economic growth, the need for portfolio companies to deliver EBITDA improvement through sustainable procurement activity is key to creating long term enterprise value for their Private Equity investors.