Outsize Growth Leads to Outsourcing Procurement

The past decade has seen explosive growth within the private equity industry, with total assets under management more than doubling from roughly $2 trillion in 2013, to a whopping $4.4 trillion by 2023, according to EY. But while assets under management have rapidly ballooned at many PE firms, in most cases staffing has failed to keep pace. As a result, the staff at many PE firms, particularly mid-market and smaller firms, have found themselves struggling to do double duty by assuming some of the administrative tasks of overburdened back-office workers.

When Jamie Davis first joined Bow River Capital in 2019, the Denver, Colorado-based private equity (PE) firm had less than $800 million in assets under management (AUM) and roughly 25 employees. In less than four years, Bow River Capital’s AUM has grown to $3 billion, yet the firm’s staff remains just under 50 employees. This trend is similar for most mid-market firms – explosive AUM growth, but headcount not keeping pace.  

And the problem has only been exacerbated since the onset of the “Great Resignation” as the end of the COVID-19 pandemic saw record numbers of people voluntarily leave their jobs, creating a dearth of skilled employees and expertise within many critical areas for PE firms. Atop all of that, PE firms across the board are grappling with heightened margin erosion, as fees for everything from data services to technology have soared in recent years – a problem hitting midsized and smaller firms particularly hard.

“We’ve been growing a lot, but we’ve not been growing headcount as fast as revenue. And I think a lot of peers are in similar situations,” says Davis, the multi-strategy firm’s Chief Financial Officer (CFO). “So much of our energy and attention is focused on delivering investment returns… there was this big black hole - this big area of spend that we just didn’t have the time and attention to focus on. But it was material dollars,” he says, noting that the firm’s spending on data alone was in the high six digits. To save money and free staff from the headache of dealing with back-office issues, like managing data subscriptions so they can instead focus on delivering investment returns and raising capital, Davis decided to outsource the bulk of his firm’s procurement needs.  

The Case for Outsourced Procurement

A growing number of PE firms are turning to outsourced procurement as a way of removing back-office distractions so that employees can focus on higher priority issues for their firms. Beyond cost-saving benefits, procurement-as-a-service offers PE firms a way to supplement their organization’s expertise without the need to bring on additional employees. Outsourcing also provides an additional layer of risk management surrounding third-party relationships, a realization not lost on investors who have been helping drive the adoption of procurement outsourcing to boost firms’ own due diligence efforts.

Private equity firms rely on outsourced partners for a variety of services, typically related to investment opportunities. When service providers across the board are collectively tallied, from accountants and lawyers to consultants and investment banks, Trilantic North America’s Partner and CFO, Elliot Attie, says it is not uncommon for middle market PE firms to spend up to or beyond seven figures. Attie believes the value of tapping outside expertise for procurement is also just as prudent for firms. “In private equity, we spend a lot of time performing due diligence before we make an investment, which includes relying on subject matter experts across a variety of areas. So why wouldn’t we also apply a similar mindset to the service providers we engage? They can now also be diligenced, benchmarked and assessed by subject matter experts who can inform us on what we are buying before we commit to do so.”

Though the majority of bulge bracket PE firms continue to manage back-office functions internally (those with more than $15 billion in AUM), roughly half have turned to technology and outsourcing to help with their efforts to reign in margin erosion. According to EY, 72% of firms within this group have embraced technology to help offset margin erosion, while 62% have utilized outsourcing. Mid-sized and smaller firms, on the other hand, absent the deep pockets of their biggest competitors and faced with an ongoing scarcity of qualified talent, have begun to more actively outsource the entirety of their back-office. As a growing number of CFOs at mid-sized firms seek more time to focus on strategy and overseeing more critical areas of the business, such as capital raising and identifying profit generating investment opportunities, outsourcing is an attractive solution.

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