Portfolio Power: Pooled Purchasing
Private equity firms create programs to save money at the portfolio level
As saving money and creating value at the portfolio level continues to be at the forefront of everyone's mind, an increasing number of private equity firms are setting up pooled purchasing plans to give their portfolio companies a leg up. Mergers & Acquisitions convened a special roundtable with some of the pioneers in the space to discuss the benefits and challenges of creating a pooled purchasing program across a private equity portfolio. UnitedHealthcare sponsored the event and the excerpted discussion that follows provides a range of perspectives on what private equity firms with pooled purchasing programs are doing and what they expect to happen with these programs in the near future. Participants included private equity investors, a consultant on performance improvement and a vice president from an insurance company.
Tom Byrne, director, performance improvement consulting services, McGladrey; Roberto Ferranti, vice president portfolio operations, Baird Capital; Danielle Fugazy, contributing editor, M&A (moderator) Michael Groeger, national vice president for private equity, UnitedHealthcare (sponsor); Pam Hendrickson, chief operating officer, The Riverside Company; David Knoch, senior managing director - strategic services, Irving Place Capital
Fugazy (moderator): Each private equity firm here has some sort of pooled purchasing program. How do your programs work?
David Knoch (Irving Place Capital): One of the strategic initiatives we've done over the last nine years is build a stronger operating orientation in our firm. We are a better partner to management today and bring more resources to the table. We are about building capability and scale for companies that can't afford these resources. That's part of our business model, and it's been pretty successful for the past several years. There are things that are common across the portfolio, like insurance, health benefits-indirect purchasing categories; any and all kinds of professional services; treasury and real estate. We have methodically built the capability to leverage common spending and best practices so we can help our companies execute. Our portfolio companies alone don't have scale or buying power. We have methodically built this platform as a way to create opportunities for portfolio companies to save money, amongst other things.
Roberto Ferranti (Baird Capital): We look for opportunities to improve portfolio company performance and leverage the size of the portfolio across a variety of areas and geographies. For example, we have several initiatives with the indirect side of spending. But we also have some experience with direct sourcing. We complement that with our team in Asia that we use for opportunities on a company-by-company basis to source directly from Asian suppliers, often leveraging relationships across the portfolio companies. We are expanding that from China to India and Vietnam, and we are exploring Mexico and Brazil as well, so we have a global perspective.
Pam Hendrickson (The Riverside Company): Our program has existed for the past eight years. We negotiate big contracts for our little companies. We also have a team in China that helps not only sourcing, but also selling into China, which has been a really great opportunity for some of our companies. Our analytic and sourcing team negotiates the big contracts and looks at analytics on companies. We also have something called the "Riverside tool kit," which is consultants that have been vetted by various people in our companies.
Fugazy: Are your portfolio companies mandated to sign up for your programs?
Hendrickson: Our view has always been the programs have to stand on their own sufficiently so every CEO goes: "Well, I'd be an idiot not to save 40 percent on my shipping." Occasionally, we do have a company that won't want to join. Reasons they give for not joining the program are things like: "My brother-in-law is my insurance broker," or "They deliver pizza every Tuesday to our firm." CEOs who are incentivized appropriately on the Ebitda line will very quickly get over that. Most of our programs do save portfolio companies 30 percent to 40 percent. If you can save 30 percent on telephony or on shipping, it's really worth it to do that. But we don't like to pound everybody upside the head.
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