Will private equity portfolio procurement catch on in Europe?
Can Europe’s private equity groups leverage procurement like their US counterparts?
US private equity-owned groups have hit the headlines over the years as a result of combining their purchasing power to bulk buy from suppliers.
As early as 2012, The New York Times reported that firms such as KKR and Blackstone had aggregated procurement in categories such as computer hardware, office supplies, car rentals and customer deliveries across portfolio companies to shave millions of dollars from their costs.
The approach is, in effect, to treat a portfolio of companies as a conglomerate, centralising procurement negotiations and terms. The aim is to increase the bargaining power of individual companies by acting collectively, gaining the benefits usually only available to large companies.
This follows the example set by GE decades ago, when it established a central procurement function to buy in bulk across the diverse range of companies it owned at the time, spanning the aerospace, energy, consumer and finance sectors.
Spurred on by these success stories, European private equity firms and the European arms of US houses have looked to establish similar programmes. PEPCO, which now manages procurement services to around 30 private equity houses, is one such example. US player CoreTrust has also established a European operation to provide similar services to those it offers in the US, aggregating the spend across a series of categories for private equity portfolio companies.
In an environment of high asset prices, the need for private equity firms to grow equity value through cost optimisation, among other strategies, has become more acute. The idea, therefore, of creating programmes that leverage the scale of purchasing requirements across the portfolio has some allure.
In an environment of high asset prices, the need for private equity firms to grow equity value through cost optimisation, among other strategies, has become more acute.
Leveraging procurement in Europe
Yet for private equity firms attempting to create value through procurement in Europe, the picture is rather more complex than in the US.
Despite EU-wide initiatives to create a single market, Europe remains highly fragmented. Different countries, cultures, ways of doing business, tax regimes and local suppliers offering varied terms create barriers to aggregating procurement across the portfolio in Europe that do not exist in the US.
While there is a small handful of notable exceptions – see case study 'Portfolio procurement the Nordic Capital way' – attempts at replicating US models of portfolio procurement have rarely led to the same level of success, even though the European market is roughly the same size.
In the US, for example, it’s possible to negotiate a deal for healthcare benefits that works across the country given that the system is nationwide. In Europe, different providers in different markets provide offerings tailored to the healthcare markets operating in each country. What works for Italy in terms of healthcare benefits is unlikely to work in the UK.
The fragmented nature of the European market means that the benefits and savings of adopting a portfolio-wide approach to procurement are therefore often too small to be worth the significant effort and resources involved in setting up, supporting and managing a successful programme.
In addition, the benefits to suppliers are smaller, making this a less attractive proposition for them. However, this does not mean efficiencies can’t be gained across the portfolio when it comes to procurement.
Private equity firms can manage their portfolio spend more efficiently. Those with sufficient scale may have more options open to them, provided the programme is well managed and executed.
Increasing equity value through procurement
At Efficio, we’ve seen private equity firms experience some success in helping to bring about shared, better value arrangements on a more ad hoc or selective basis for specific categories for their portfolio companies. For this to work effectively, there are five points to consider:
1. Understand spend in each portfolio company. By knowing how much each company spends and on what, it’s possible to identify areas where this could be reduced through negotiating new contracts with suppliers.
2. Work out which categories or areas could be negotiated on a shared basis. Once savings have been identified at an individual company level, it’s clearer where there is potential to help companies work collaboratively to negotiate bulk purchases. Given that private equity groups may have a variety of companies from different sectors, it may be that it is only a viable strategy for one or two categories, such as, for example, IT hardware or travel.
3. Don’t force the issue. Private equity firms that have achieved the smoothest and best outcomes have offered their portfolio companies opt-in schemes rather than requiring them to sign new contracts. In our experience, success relies on buy-in from the management teams involved rather than top-down imposition of new supplier terms. For example, some companies may require more bespoke services or products than a blanket arrangement may provide for. In addition, this kind of shared arrangement requires internal champions who are enthusiastic about the benefits, while the imposition of terms can be viewed as unnecessary tinkering by private equity owners.
4. Provide a focal point for companies to share best practice on procurement. This could be through the creation of networks and events, so that those responsible for procurement in portfolio companies can build relationships with each other and feel comfortable sharing knowledge and information.
5. Facilitate negotiations for portfolio companies. Produce standard contracts that companies can, for example, access online to help them negotiate and secure better terms from their suppliers.