How to Adapt the Private Equity Playbook to Increasing Interest Rates and Inflation

Rising interest rates and persistent inflation have asset managers preparing for significant macroeconomic headwinds in 2023. Gone are the days of delivering above-market returns without doing the hard work of improving the operational performance of portfolio companies.

Private Equity firms that center their strategy primarily on sourcing and capitalization for the investment team and the operational team will be outmatched by more value-oriented investment theses. More progressive firms are refining the third chapter in their playbook and investing in players and tools to support the newer operations team, that act as in-house consultants to become operating partners for portfolio companies, leveraging industry and functional experience to improve performance.

A “team of teams” approach builds resilience and capitalizes on in-house experience in specific industries to compete in a game where leverage is becoming increasingly expensive and multiples are contracting. Sharing best practices and pooling resources is a scrappy approach that improves margins and maximizes learning across the portfolio. The best asset managers drive portfolio companies towards fractional shared executive expertise, group purchase discounts for common services such as travel, technology, and market data, and risk pooling.

Firms that want to create long-term value need to attract and retain top talent, in the form of star executive players and operational bench depth. The best fractional executives, operating experts, and marketing gurus expect to be quickly and efficiently onboarded and enabled with the best tools, benefits, and travel policies.

Above all, it’s past time to tighten the belt. Private Equity CFOs can find low hanging fruit for reducing costs at both operating companies and portfolio companies by focusing on procurement. Too many in-house procurement professionals are in a reactionary stance, primarily focused on purchasing, contract and supplier management, and invoice reconciliation.  

One way to save real money is to roll up your sleeves on the logistical details of entitlements and license management and to look hard at your spend allocation across employee, office, department, level, and supplier to ensure it is in line with the best practices of your peers. The leading opportunities for Private Equity firms are in proactive areas of expert vendor management and landscaping, supplier intelligence, and benchmarking.

CFOs who are determined to efficiently realize sustainable value even as their bench of in-house players stays lean are looking to procurement management software and service solutions that are driven by deep domain knowledge. Outsourcing the procurement function to domain experts who have their finger on the pulse of the industry and using software that maintains a single source of truth globally, allows CFOs to keep their eyes on the prize and enable their professionals with world-class tools, risk management, and travel.

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