Supply chain scrutiny urged in order to uncover hidden risks at portfolio firms
With U.K. private equity buyouts soaring almost 70 percent in the third quarter of 2019, PE firms have, of late, been on something of a buying spree
The number of U.K. buyouts in the July-September 2019 period rose to 61, with total deal value increasing 68 percent to £12 billion. Meanwhile, across Europe, the total volume of PE buyouts in the quarter reached a 12-year high with 296 deals, according to research by Unquote Data. Total deal value increased 28 per cent on the second quarter to €52bn (£46.8bn).
Nearly a quarter of U.K. private equity deals this year have been concentrated in the technology sector, figures from financial data provider Refinitiv reveal.
The latest PE numbers are all the more impressive in the context of Insolvency Service figures showing the tally of companies in England and Wales unable to pay their debts rose to an almost six-year high in this year’s third quarter.
So where does procurement fit into private equity firms’ investment strategy? And how can its role help leverage value from PE portfolio companies? Most notably, by which procurement criteria – if any – do PE funds gauge their prey? How are their targets screened and selected, when are investment assessments made and what manoeuvres performed to buy into – then transform – investee companies?
Odesma approached a number of leading PE players to discover their methods, business and investment philosophy, including whether they factor in supply chain risk.
Overall, the funds we spoke to appear to maintain a consensus on essential criteria for investment. These include:
- The company is scalable
- The company is attractive to potential acquirers
- The potential exit provides the return the investor needs
- An excellent management team
Yet one striking feature that emerged from our research was that none of the firms canvassed considers supply chain vulnerability specifically or procurement prowess generally factors to consider when assessing a prospective – or existing – investee firm. And that’s alarming from a number of perspectives.
Supply chain risk is bread-and-butter to procurement professionals. Any systemic exposure of commercial organisations to errant or unreliable suppliers carries untold risk to all who manage a private equity company’s portfolio.
In the heady world of major-league PE investment, with its attendant stratospheric stakes, bruising boardroom bash-ups and share price gyrations, shouldn’t supply chain risk and procurement prowess be an integral part of any fund’s assessment philosophy?
With assets under management of £30 billion, Elliott Management maintains an influential, highly-active affiliate office in London. Paul Singer, it’s founder, co-CEO and co-CIO (Chief Investment Officer) places great emphasis on risk awareness, mitigation and hedging.
To Institutional Investor alpha magazine Singer revealed: ‘I felt – and it was part of my strategy then and is part of my strategy now – that being risk managed at all times and hedged at all times is the only way to actually control risks. Constant scepticism and an existential sort of humility are very useful in risk control.’
‘You have to be in risk management mode all the time, not just when you might be particularly nervous, because it is impossible to time the transitions of markets to crisis conditions. And as your firm grows and you and your organisation go through changes in your life circumstances, you need to keep constant the energy, humility and intelligence that built your track record. Coasting in money management does not turn out well.’
Salesforce Ventures, the venture capital arm of dominant cloud-based CRM software company Salesforce, in May 2019 launched a £97 million European Trailblazer Fund to fuel cloud innovation. Last year it was the most active corporate venture capitalist in Europe, investing private equity in digital payments, machine vision, artificial intelligence and blockchain
Alex Kayyal, Europe Head at Salesforce Ventures, explains he looks for businesses that can scale rapidly and disrupt incumbent markets. ‘In the world of software, physical supply chain is less relevant.’
Many organisations do not actually know who spends what – or with whom. Still more have little objective evidence about how well, or poorly, their suppliers are performing. This is where strong procurement functions excel. They have the ability to analyse spend and act appropriately to manage cost and increase profitability.
An investment in procurement has a very obvious return. Whereas most organisations invest in activities critical to customer satisfaction, increasing market share, making sales or improving profitability, most don’t realise the potential they have to impact all of these – at once – by investing in procurement.
So, despite acknowledging how critical is managing risk, PE firms continue to display a glaring oversight when it comes to supply chain risk in particular and lack an appreciation of procurement specialists’ expertise. This blind spot could prove especially costly during the evaluation of prospective investee firms.