The battle against inflation is being waged at the portfolio level in the private equity industry, with 107 financial sponsors weighing into EY’s 2022 global PE survey reporting efforts to contain costs. The largest firms’ cost mitigation efforts look a lot like those for organic growth—investing in technology codes for rich exit opportunities as much as it does for portfolio management. But other tactics are a bit more surprising.
Take increased outsourcing. Thirty eight percent of firms managing $15+ billion have decentralized certain services in order to cut costs, while 47 percent of smaller firms have done the same. That makes outsourcing the most popular margin-saving tactic of firms managing less than $15 billion in assets.
In a move that might come as shock to real estate investors sitting on massive returns, heavyweight sponsors are also saving expenses on office space square footage. A third of larger firms cut their office footprint, while 23 percent of firms managing less than $2.5 billion did the same. The disconnect between real asset valuations and office leasing rates might continue to be explained by offsetting strength in last-mile logistics industrial and multifamily, if the trend continues.
Sponsors reduced headcount across the board, though hiring is also an area where savings are to be had—on junior employees, in lieu of senior talent. A third of managers with less than $2.5 billion took this approach, while close to a fifth of larger firms showed a preference for junior hires.
And then there’s the headline-grabbing mitigation efforts we all read about daily: passthrough costs and vendor fee renegotiation. The menu of margin expanding options is growing long indeed for the industry.
–Brandon Zero
