Saving A Buck

I spend the majority of my working life talking with people who work in and around the private equity industry about what’s new and what’s going on in the market. (I like to find things to write about other than the fact that there isn’t any leverage and that there are no new deals getting done.)

As expected, many private equity professionals say they are spending more time with their portfolio companies today. I have come to understand that “spending time on our portfolio” can mean anything from helping portfolio companies act strategically in the current environment to trying diligently to resuscitate a company that’s on the brink of death. Somewhere in between those two scenarios I have been hearing about ways to save money on the portfolio level.

The first money saver is when investment professionals are asked to go work at a portfolio company. Many times the choice for these investment professionals is to either to go work at the portfolio company or face the potential of being laid off at the private equity firm. Oh, and the words investment professionals can be replaced with marketing professionals as well. “Private equity firms have to make sure they are doing what is right to keep things together the best they can,” says one consultant. “Private equity firms have a responsibility to their LPs to make the hard choices that will generate the returns.”

Pool purchasing—which has been around for quite some time but never took a strong hold over the market—is making a comeback, at least in conversation. The more portfolio companies a private equity firm has under its umbrella the greater the potential to create pooled purchasing arrangements that can help boost value by cutting costs while portfolio companies receive volume discounts on everything from healthcare to office supplies.

Pool purchasing seems like a great idea but many private equity players say pooled purchasing can be a headache because portfolio companies often resist anything new. However, private equity firms have the ability to force pooled purchasing on their portfolio companies and as the consultant said, private equity firms have that responsibility to their LPs to generate the best returns possible. Why wouldn’t more private equity firms be pushing portfolio companies to take advantage of pool purchasing programs? We know it isn’t because they can’t keep up with deal volume.

Danielle Fugazy
danielle.fugazy@sourcemedia.com