In today’s private equity (PE) environment, fund count has fallen precipitously relative to 2021, when deal flow was at a record-breaking high. For context: Blackstone Group, the largest private equity firm, posted a $29.4 million loss in Q2 2022. SoftBank Vision Fund, the world’s largest technology-focused fund, has also fallen short as investments halved in Q2.
Investors’ sapped risk appetite is understandable given today’s economic volatility — we’re dealing with 40-year high inflation, war, rising commodity prices, supply chain disruptions and other geo-political impacts. But as always, the show must go on! PE firms are doing whatever they can to keep their portfolios successful.
David Bush, CEO at Simfoni, a leader in spend management, discusses how private equity firms are adapting to today’s PE environment.
The two main trends that are shaping the current PE environment
There are two main trends right now in today’s PE environment: dwindling returns on investments and a focus on environmental, social and corporate governance (ESG). What these two trends have in common is that they are both easily addressable with a concentrated focus on digital procurement. PE firms are looking to procurement for category-driven savings and enriched supplier data in order to make ESG-focused, profitable decisions (and fast) — this requires both talent and the right technology. The right technology can tell them how to achieve the most savings (tell them how and when to consolidate suppliers, change suppliers, offshore, near-shore, outsource, co-source, hire contingent labor, etc.), and the right talent allows them to actually apply the technology and carry out data-driven tactics.
Many firms lack access to the appropriate level of talent and/or technology to truly harness the potential that exists across their portfolio base. For example, firms managing mature portfolio companies (portcos) often have poor spend visibility as their portcos typically operate on legacy systems with spotty data; this makes it a challenge to create a strategic sourcing process and to track savings results (let alone ESG metrics). Moreover, when data is messy and baselines are hard to validate, technology implementations become more cost- and time-consuming. Average-sized PE firms – those managing under $5 billion – are sometimes proactive in capturing cost savings and establishing scalable technology frameworks, but despite airtight data processes, they often lack the right analytical capabilities and dedicated procurement resources. They may have only a few people trying to manage hundreds of millions of dollars.
Ultimately, all firms are working to improve their talent and/or technology to optimize their procurement function because in today’s environment, the bottom-line is more within our control than the topline. Without a doubt, the most common barrier to gaining this control is a lack of spend visibility. Without spend visibility, they cannot pinpoint the exact causes of lost savings within and across the portfolio.
PE firms need to find and drive immediate savings across their portcos
Fundamentally, PE firms need to know who is paying for what (on a category level) and from where. If firms can actually show this data in a meaningful way to their portcos, portcos are then galvanized to get on board with PE objectives because they can see the quick wins made possible through:
In most cases, internal procurement teams have limited capability and capacity to employ and reap the benefits of these strategies — in many cases, a dedicated procurement team doesn’t even exist. Because of this, PE firms are using a combination of four main channels to accelerate and sustain the benefits:
- The internal procurement teams
- External resources (operating partners, consultants, managed services)
- Technology investments
At the end of the day, PE firms and portcos are looking for simple and fast ways to impact the bottom line. A myriad of different strategies need to be launched simultaneously and the most basic objective is to get spend under management through whatever means makes sense.
The biggest opportunities that are often overlooked
PE firms often overlook some of the biggest opportunities to drive cross-portco optimization, such as:
- Internal and external GPO offerings that could impact between 5% and up to 50% of their spend
- The impact of low to mid-sized category spend because they are fixated on the big category spend
- Tail spend: when managed, savings are immediately realized
- Contract infringements: they don’t track and drive contract compliance
- Supplier performance: they lack thorough benchmarks that measure performance against pricing
- ESG metrics that could be found using procurement data
- The need to create a center of excellence that manages transactional procurement and AP; individuals should be dedicated to leveraging FinTech solutions effectively and obtaining cash-back rewards
- The need to create a core supplier pool at the group level so that portcos can manage the suppliers, eliminate the long tail and innovate across the board
At the end of the day, “overlooking” key opportunities is inevitable without proper spend visibility.
Spend Analytics – breaking the mold for PE organizations
We hear from top procurement leaders that tail spend management is the holy grail of strategic procurement because it’s a huge challenge to execute, but once executed can drive big savings. PE firms might see the value of tail spend management, but they don’t just want the immediate benefits of a single spend-analysis project. They need transformation that not one type of service channel alone can accomplish. Consultants, for example, usually offer a band-aid approach and deliver savings on only a set number of categories.
At Simfoni, we break the mold because we become a true extension of the procurement function by providing both technology and managed services (for mid-market firms, we call it “Procurement in a Box”). Our turnkey combination of technology and managed services gets more spend under management than either does alone. Our technology generates easy-to-understand reporting that firms can use to continuously manage tail spend on a granular, category level across the entire portfolio. Our in-house specialists work one-on-one with stakeholders or even suppliers to capture savings opportunities that others don’t have the time or means to achieve themselves. No matter the program we are carrying out, we cause minimum disruption by plugging into rather than upending customers’ existing technology stack. We even provide the necessary change management to make the most sustainable impact.
And while I’m on my sales pitch, we break the mold by offering both pay-per-use and a performance-driven model called Pay-As-You-Save. In a low-budget scenario, we even deploy a supplier pay model in which we take part of the savings, but from the supplier which limits the bills to the customer. Essentially, unlike typical project-based technology implementations, we adjust to our customers’ needs rather than the other way around. We’re all about creating flexibility for our PE customers, taking the most realistic approach to helping their portcos and their overall cause no matter the economic circumstances. You may even call us a friend, but we can take it slow: the first step is a demo.