The Harvard Business Review has stated that Private Equity has a problem. The June 2021 article by Karim Khairallah and François Mann Quirici  is aptly titled Private Equity’s Mid-Life Crisis and calls time on the diminishing returns from traditional approaches of just buying, improving and selling a company.

The next frontier of Value Creation

According to HBR, the next frontier of Value Creation is the creation of business ecosystems within PE portfolios; leveraging the horizontal links between portfolio companies. In the basic example given, two businesses could coordinate the procurement of common services (such as employee health insurance) to reduce costs. The incremental value derived from leveraging the portfolio this way complements vertical value very well — the horizontal links between companies give PE firms more, and novel, options for increasing their portfolio’s worth.

According to the Harvard Business Review, in sophisticated cross-portfolio arrangements, operating profit can be increased by 15% or more.

How do PE firm’s create and realise the benefits of the Ecosystem approach?

We work closely with a number of PE firms and Cross-Portfolio Procurement provides the operational mechanism by which EBITDA can be significantly improved. There are five levers:

Lever 1: Use data to identify the opportunities.

Spend Analysis across the portfolio, with common categorisation, provides the transparency to identify and prioritise the cross-portfolio opportunities. Building a cross-portfolio spend analytics platform isn’t easy but provides the delivery roadmap.

Lever 2: Realise quick wins by trading inside the portfolio.

Inter-portfolio trading relationships, buying and selling goods and services between portfolio companies, provides a way to generate revenue, share margin co-operatively and keep cash within the portfolio.

Lever 3: Identify common suppliers, harmonise pricing and negotiate based on volume.

Quickly comparing and harmonising pricing for common suppliers delivers quick savings and then negotiate improved terms based on volume and leverage the PE growth story.

Lever 4: Target categories and use frameworks to leverage portfolio scale.

Categories such as insurance, fleet, professional services, hardware and software work well with a portfolio approach, particularly when the PE firm is used as the commercial lead.  Framework agreements can be put in place, allowing portfolio companies to utilise preferential rates.

Lever 5: Utilise a GPO for low value, catalogue products.

Leverage the scale of the portfolio, and other portfolios, by using a GPO (Group Purchasing Organisation) for low-value categories such as office supplies, IT consumables, PPE and uniforms.

Vertical and horizontal procurement are not mutually exclusive.

But don’t forget that single-portfolio company strategic sourcing is still a big lever. If the high-spend, categories within each of the individual portfolio companies haven’t been optimised through professional procurement, you are leaving money on the table.

Apax Partner’s Operational Excellence team drive cross-portfolio benefits, using spend analytics through their Cost Insights platform to identify opportunities both vertically for individual portfolio companies, and horizontally across the portfolio, and realise them through a number of partner relationships for common categories.


Article reference:

Harvard Business Review; Private Equity’s Mid-Life Crisis

By Karim Khairallah and François Mann Quirici

For further information or to discuss how Procura could help your PE firm, through cross-portfolio procurement or just traditional vertical procurement excellence – please get in touch:

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