How can PE firms differentiate and manage efficiencies across their portfolio companies?

With the boom that the investment sector has recently experienced, it has become one of the most competitive financial market spaces. According to Preqin, over the past decade, assets invested in PE and related asset classes have grown from US$1.7b to more than US$4.4t. Not only are PE firms competing among themselves, but their portfolio companies who are out in the field are also competing for customers and profits. As more and more PE firms emerge, supporting more and more start-ups and new businesses every day, how can they prevent being just another clone in the industry?

No room for inefficiency 

According to a report by EY, by the beginning of 2020, there were already 3,524 private equity funds in the US market and 1,679 PE investment vehicles with a focus on North America, having raised over USD460 billion in capital. By 2025, PE assets under management are expected to exceed US$9t. With monetary numbers like that the room for error must be exceptionally low. So, how are firms ensuring that they’re running not just efficiently enough to survive the ever-competitive market but also thriving in it? 

For starters, they’re changing their perspective. While the rule of thumb up until some years ago had been cost optimization alone, the PE firms are now approaching their partnerships with the agenda of growth and an all-around mentorship for the portfolio companies. This shift in perspective has led them from seeing the value in revenue increase rather than increasing cost margins, a strategy that is only good in the short run. 

Another essential factor over the last couple of years in ensuring success has been using technology to their advantage. According to an EY report - “The shift from balance sheet optimization to operational value creation will continue as firms rethink how to create value from investments in innovative ways. Real-time reporting will enable firms to enhance their decision making about portfolio companies, and they will employ digitally empowered transparent reporting to boost investor confidence”

Tech Talk 

We’re living in times where technology has continued to evolve faster than it ever had. While many believe that the technology is here to take over, smart minds are using it to their advantage as tools for minimizing cost, effort, and scope of errors. 

PE firms are no exception to this. A smart firm today ensures that it has assistance from tech tools at every step to maximize not just its own potential but also that of the portfolio companies. 

The pandemic has shown the world that things can change with no warning. This includes market needs, customer demands, and even existing channels of services and sales. To keep up with an ever-evolving market the firms must utilize all their human resource potential in doing the things that cannot be automated such as problem-solving, and understanding consumer behavior. And for everything else, there are tools. 

An Intricate Balance

At any given point a PE firm is doing a lot. From communicating with and managing portfolio companies to running its operations, it’s a wide arena of tasks and departments that the firm is juggling with. This is why you’ll see that any successful PE firm uses not just one or two but a whole range of tools that work symbiotically to create an efficient system for them. Starting from multiple types of CRM tools and branching into talent seeking, portfolio management, research, and a lot more. 

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The right tools don’t just help the firm run its business smoothly but can also assist portfolio companies lacking in resources. At the end of the day, what helps the portfolio companies excel is in favor of the firms. According to a report by EY, at the PE funds of the future, the imperative for digital tools runs throughout the enterprise.  With the revelations that the pandemic brought on, implementing a strategic use of these tools has become increasingly important throughout the life cycle of the deal. The firms that have been able to successfully take advantage of tools that help them manage and vet vendors for example are more likely to generate profit and create greater returns. Since the tools take a large chunk of manual research and operations off their hands, it helps both the firms and the companies focus their manpower on more crucial things, resulting in better results for both parties. 

The Vendor Tools

When it comes to tools, the one thing that is central to better performance by the portfolio companies is vendor management. Business cannot be done in isolation. When trying to scale up a business for larger revenues, the companies need reliable partners and vendors they can rely on. As a crucial part of the ecosystem, the absence of a digital platform that streamlines vendor management can cost the firms and companies their precious time that must go into strategizing and growing the business. Apart from time, an unorganized vendor system means a lack of cost optimization. PE firms can prove to be a major client for vendors and bringing them together on a single platform can ensure healthy competition. This means better pricing and deals for the firms. 

The Proven Tools 

Solutions tools like GetProven don’t just streamline vendor management but also add a layer of credibility to the array of vendors and services offered to you, saving the firms an entire round of digging up proofs of credibility and vetting each vendor individually. While it might not sound like a lot, when the number is amplified to 100-200 vendors for every firm the task at hand becomes gigantic. 

Another factor that tools like GetProven bring in is a kind of automation in the ecosystem. By offering peer-to-peer cross-pollination the firms become a part of a self-reliant system that benefits everyone involved. With firms like Softbank, Serent Capital, and AEA that already use the platform, other firms can benefit by simply replicating their choices that have proven to be successful partnerships, saving them a great deal of manpower and resources. Not only does it give you the reliance on the experience of other firms but their ability to give feedback for each vendor on the platform. The feedback system ensures a sense of responsibility on the vendor’s part to provide their best to every portfolio company. 

It also makes the interaction easier by bringing the portfolio companies and vendors all on a single platform. 

It is no secret that the future of PE funding lies in value creation and growth and not just monetary assistance. As more and more firms change their outlook and opt for overall revenues over margins the need for digital tools increases.