Private Equity (PE) investment is on the rise in the EU and the US. However, most of us still don’t know very much about what PE is, how it works, or what Procurement’s role is when dealing with a PE firm. That’s why it was great to see this recent article over on CPO Agenda on The Final Frontier for CPOs that tried to create more transparency around the practices and importance of Procurement and Supply Chain in this field.
The first thing to note is that PE groups generally make their money by increasing the value of their portfolio companies while retaining part of the generated value by the time they exit the investment in the company at a higher financial valuation. The acquisition of a portfolio company is financed from funds that are raised from private and institutional investors that give the PE group the task of investing the money, managing the portfolio companies and returning an appropriate profit on the investments.
Given the pivotal role that Procurement and Supply Management have in a company’s competitiveness, product innovation and environmental and social footprint, Procurement and Supply Management serve two important tasks in a corporate context from a PE viewpoint:
- a strong cash flow contribution to meeting debt obligations under the financing terms in the short term
- a dedicated and measurable effort to swiftly and sustainably improve EBIT and company valuation in the medium term
Remembering that cash is king in a PE buy-out, cash-flow is crucial. Giving Supply Management’s razor-sharp focus on cost reduction and cost control, Supply Management improves cash-flow that is the vital blood of a PE turn-around. It does this by
- releasing supply-chain related working capital tied up in unnecessary inventories or unfavourable payment terms
- achieving like-for-like annual company spend reductions of 3% to 6% though the establishment of price competitive with the most suitable suppliers
Plus, Supply Management’s focus on sustainability helps PE since
- a lasting and recognizable improvement of the procurement and supply chain capabilities can have a considerable positiveeffect on the sale price of the company
- the benefits of cost engineering, supplier development and supply chain relocation can be harnessed within the typical investment period of four to five years
And Supply Management can benefit from PE and their support for the establishment of procurement platforms they strive to harness spend synergies (mostly in indirect materials) and best practice across the portfolio companies. In other words, done right, PE and Supply Management can be a win-win relationship.