Blackstone Inc. is buying a company that controls how a swath of businesses owned by private equity firms secure and pay for goods and services as varied as printers, pallets and postage.
The world’s largest alternative asset manager agreed to buy a majority stake in CoreTrust, a business that started within a supply arm for hospital giant HCA Healthcare Inc., Blackstone executives said. HCA’s HealthTrust subsidiary will continue to hold a minority stake in CoreTrust. A Blackstone spokesperson declined to comment on financial terms of the deal.
CoreTrust aggregates the buying power of its customers — mostly companies backed by Blackstone and its investment rivals — for a negotiated group discount with service providers for purchases spanning software subscriptions to forklifts. The deal may reverberate across private equity though, prompting some firms to reconsider whether to keep steering portfolio companies to CoreTrust, given the new ownership.
Blackstone is taking measures to keep their business. For instance, it won’t collect commissions from vendors anymore for referring portfolio companies to CoreTrust after the deal closes in coming months, according to a representative for the firm. New York-based Blackstone, which is making CoreTrust investment through its buyout arm, won’t have access to rivals’ trade secrets through the purchase.
Advantage of Scale
Blackstone is banking on CoreTrust’s customers to stay on given the advantage of economies of scale, and to hedge against inflation. It also plans to expand the company’s reach beyond its main clientele.
“As you become a bigger customer, you move to the top of the queue and get some benefits in supply chain certainty,” said Peter Wallace, Blackstone’s head of core private equity.
“Inflation is the biggest story in the country right now,” he said. “With this on the top of everyone’s agenda, it’s easier to get more people on it and drive more adoption.”
Representatives for HCA and CoreTrust didn’t immediately respond to requests for comment.
In 2004, Blackstone invested in a hospital system network that used HealthTrust. The firm considered starting a group-purchasing business but ultimately asked HealthTrust to start a division to do it for them.
Blackstone has steered hundreds of portfolio companies to CoreTrust, which saved them almost $200 million over the years, said people familiar with the matter who asked not to be identified because the information was private. Blackstone doesn’t dictate where those businesses buy supplies, the people said.
Other clients have included portfolio companies of Onex Corp. and KKR & Co., according to CoreTrust’s website.
Bulk purchasing recognizes that “portfolio companies can unlock new value in each other” rather than be “a bunch of isolated, individual investments,” said Francois Mann Quirici, a founding partner at Nexus Associates, who advises buyout firms on how to take advantage of cross-portfolio linkages. Firms including Carlyle Group Inc. and Oaktree Capital Management have been exploring how to centralize procurement for their portfolio companies.
The strategy has generated extra fee streams for the private equity industry, who pocket money in exchange for matching up portfolio companies with group purchasers.
Those types of commissions have attracted the attention of regulators and pension funds. During the Obama Administration, the U.S. Securities and Exchange Commission examined the practice, calling out Welsh, Carson, Anderson & Stowe for failing to tell investors about money received for portfolio companies’ purchases. Welsh Carson, which settled with the SEC without admitting or denying any findings, declined to comment.
“Group purchasing organization has been a big part of the Blackstone strategy,” said Jeremy Smith, head of public sector at London-based consulting firm 4C Associates. “Now Blackstone has not only their own scale, but that of other private equity firms too.”