What’s a Private Equity Owner Gonna Do?

Today's blog on private equity firms comes from Peter Allen, Partner and Managing Director, TPI.

Doing nothing is not an option.  With a cloudy horizon for IPO activity of size, outsourcing and offshoring seem to be gaining favor as tangible courses of action for the active investor to insist upon.

Outsourcing and offshoring were often seen as a transformation of back-office functions that require a protracted program of change. They were never an area of focus for private equity firms looking to reintroduce their portfolio companies to public markets. That paradigm is now long-gone.

In the good old days, a private equity firm would buy a company with an eye towards giving management the runway to make structural changes. Without the burden or scrutiny that comes through public disclosures, acquired companies were “flipped,” often possessing a very different cost profile or set of products/services.

Those days weren’t too long ago.  Just a few years back we saw huge investment funds gobbling up big companies. These funds were a way to achieve dramatic returns through restructuring actions that were undertaken without the glare of quarterly earnings reports that reflected the disruption a transformation often entails.

That’s how investors reap the rewards of their investments and the end game is most commonly the return to the public markets via a public offering of stock.

Fast forward to today’s recessionary markets and lackluster IPO landscape, and you’ll find many investors driving the consideration of outsourcing and offshoring for their portfolio of companies. 

So, what’s a private equity owner to do?

Based on our marketplace interactions, many investors drive the consideration of outsourcing and offshoring by serving on the Board of Directors. The private equity representatives are studying the economic levers associated with improving the cost-capacity-capability dimensions of their companies and they’re challenging management to take action, improve the structure of the business, and weather the storm of a soft equity market. We see much of 2008’s demand for outsourcing coming from the financial sponsors of companies more so than ever before.

Comments

[Don Hamill]

Hi Peter,

Enjoyed your recent missive on Private Equity. Pressures are coming from many directions to improve operations and leverage efficiencies, particularly in support functions (Finance, IT, HR).

In addition to incentives to transform via outsourcing, often carve outs and other restructuring push in the other direction as well - to insource and to renegotiate large BPO agreements with big service providers to smaller ones.

The constituencies pressing for change include the board as you've highlighted as well as new leadership, and investors - along with the PE owner.

BPO solutions are constantly being evaluated, tested, measured, and challenged.

Best,
Don

[Peter Allen]

Great points, Don. Thanks. We've seen a fair number of mergers result in a review of the longer-term sourcing strategy. When one party is outsourced and one us not, there's a robust trade-off on the internal-vs-external merits.

Interestingly, it's often easier (less contentious) to review external-vs-internal than it is to select between two internal options. You can imagine the reasons!

Peter