The pandemic has accelerated the push towards digitization and using efficient systems to your advantage and profitability. Private Equity firms are no exception to the rule. As the sector experiences a boom in its growth, how are PE firms ensuring long-term, sustained success? Well, for starters they’re digitizing vendor management. An aspect that consumed a lot of time and energy for the firm and the company acquired.
According to a forecast by DeloitteInsights, the global PE assets under management are likely to reach US$5.8 trillion by the year 2025. Given the fact that private equity firms were able to raise capital worth $500 billion, the projection does not seem very far-fetched. A major reason behind the PE industry’s multifold growth has been the pandemic, that disrupted several portfolio businesses and generated a demand for funding on a much larger scale than ever seen before.
So, now that the PE sector has experienced this boom, the question is, how can it be best sustained? Apart from the opportunity that has been brought on by the global pandemic, another factor that has contributed to this growth is the attention to operational efficiency.
Firms have realized that improvement in the operations can benefit them in operating with efficiency. A number of firms are investing in digitizing operations and management tools.
PE firms invest to acquire majority ownership in small or medium scale companies with a considerable potential for growth and make them profitable. The model helps out promising portfolio companies scale their businesses, while the PE firms get the returns on their investments. In the context of recent years where Covid-19 created unprecedented challenges for companies operating on a smaller scale, the PE industry has shown a tremendous amount of promise in keeping the economies not just running but growing.
So what entails the relationship between the PE firm and the acquired companies? The dynamics involve a lot more than just monetary transactions and profits. To help the portfolio company succeed the PE firm contributes in multi-faceted ways. According to the report from DeloitteInsights, the firms are assisting companies with managing their supply chains, building digital capabilities, maintaining business continuity, and securing financing.
In order to turn the businesses into ones with larger profit margins, the companies must scale in every direction possible. A lot of successful firms are rushing towards developing digitized communication and networking systems, especially with the push that the pandemic provided towards a more tech-reliant and efficient system. Apollo Global Management Inc. increased the frequency of conference calls with management teams and created an online information-sharing portal that served as a common communications channel.
Companies with less than US$100 million in revenues speak more favorably about their investment firms. This could likely be because the smaller, first-stage companies are the ones who reap the most out of this relationship. Not just do they get the value additions that the PE firms in terms of funding, but they also get the mentorship and access to the PE’s network of trusted resources. One of the major problems that smaller companies face is the lack of substantial attention from vendors and suppliers in comparison to their large-scale competitors. This usually gets solved by the mediation of PE firms who promise large long-term and high-value business to these vendors.
Clearly, there’s a lot that’s involved in the dynamics of the PE firm and company relationship.
With so many factors at play, the equation is usually a delicately balanced one. As the relationship between the two parties branches out in several different directions, it is important for the PE firm to reduce the variables as much as possible.
But unlike a large corporation or a unidimensional business, the PE firm faces some unique challenges. While it requires the scale and standardization to manage multiple acquisitions, it must also pay individual attention to the unique needs of every portfolio company. And while some problems will need to be micromanaged, when the PE firm can standardize its vendor and supplier network effectively it can save thousands of hours in manpower and a lot of money. The right vendors and suppliers are something that the success of the business depends on greatly. A compromised relationship between the vendor and the firm can lead to a major setback in the company’s growth. While not securing the right deals can cost unnecessarily more, any compromise on the quality of supplies or services can affect the output of the company.
Creating a reliable network that can be shared with the companies ensures control over quality and effective costing strategies.
The first step towards turning a small business into a sizable one is to make cost optimizations. But implying the optimization strategies of the large-scale business models does not work when the companies that the PE firm is dealing with are sub-billion dollar ones.
The firm must take a microscopic look at the companies expenses and vendor deals. By digitizing the vendor network, the firms can gain control over a major factor in terms of costs.
Digital management of vendors correctly by the PE firm serves to be of great value in gaining control over costs.
Cost optimization aside, when a portfolio company is equipped with digital capabilities, it can offer great value by improving processes, and upgrading its offering with quality services and resources. It also enables small-scale companies to companies to compete with the giants in the same playing field.
At any given point, a PE firm is dealing with 100-200 vendors. With a number this high, the margin for errors is also significant. By digitizing the interaction and management of these vendors it helps the process be as objective and standardized as possible. For the PE firm to ensure the companies grow in the right direction, it’s crucial for them to have significant control over the quality of operations. A digitized vendor platform reduces the energy and hours that would otherwise go behind ensuring these things.
Starting stage companies are highly dynamic, they’re growing and changing at a rapid rate. This also means they need the firm and its leadership’s keen attention. Now imagine if this crucial attention went into vendor management, figuring out concessions and discounts, or quality control. When the vendor system is digitized, it takes this responsibility off of their hands.
It’s been proven that the firms that helped companies with a reliable and easily accessible network of vendors have yielded stronger results sooner.
Despite the rapid growth and a promising future for the Private Equity sector, not every firm will succeed. The guarantee for a promising future relies on the firm’s ability to adapt digitization to its advantages and provide valuable mentorship to their portfolio companies.
For a lot of firms, the GetProven platform has served to be a stepping stone towards creating an efficient and profitable digital platform that takes care of its vendor network and management. Not only does it help the firms keep a check and mandate the trusted vendors, it also streamlines the discounts and creates a democratized network that ensures quality of work from the vendors.
As an investor, you will be more successful if you help your underperforming investees brainstorm solutions and strategies for the problems they face instead of giving up on them.
We crunched the numbers, and these are the tools that portfolio companies are demanding the most, across all of our VC partnerships