A Key Missing Ingredient in the Private Equity Due Diligence Process in Today's Market
The Backdrop: It's a Sellers Market with Dry Powder at a High Within the world of private equity, dry powder has reached a new high of $1.4 trillion, having grown 17% annually since 2015. In turn, there are a lot of investors and not
enough deals to be found. It is a seller’s market, and GPs are having a tough time justifying doing deals at today’s high multiples of 12 – 17x. Concurrently, in our experience at Treya Partners, we find very few Private Equity (PE) firms formally incorporate procurement value creation into their due diligence and underwriting process. Sometimes contract risk mitigation (e.g., in the case of Carve Outs) is considered, but rarely are procurement cost savings reliably estimated and underwritten into the deal thesis. With purchase multiples being high and a fiercely competitive market for deals, GPs need to recognize the competitive edge that can be gained from reliably estimating and underwriting procurement value creation into the deal.
Why to Incorporate Procurement into the Due Diligence Process
We at Treya recommend that PE firms begin including Procurement Value Creation as a critical element of their due diligence strategy. Not only can procurement optimization improve cash flow right away, it can set the stage for future acquisitions, and ultimately, maximize value at exit. More importantly, if there is a significant procurement opportunity, it can lead to a much lower “effective” purchase multiple for the deal, allowing for a higher purchase price and ultimately in a higher close rate.
How & When to Incorporate Procurement into Due Diligence Incorporating procurement value into your firm’s due diligence is not difficult – an Accounts Payable (AP) spend analysis will give you a directional idea of the procurement savings opportunity available. Include procurement up front in your data collection efforts - request a year’s worth of AP data and know that high-level spend by vendor data will suffice if that is all that is readily available. Potential procurement savings and associated value can then be estimated from this data. In addition to SG&A expenses, COGS can also be targeted to significantly enhance the opportunity. A confidence level should be built into savings estimates to mitigate execution risk. Done right, this process will create a significant competitive edge for winning deals.
Sources: Pitchbook, Private Equity Wire
By: Barnali Mishra Mishra is a Principal with Treya Partners. Barnali has over 17 years of procurement consulting experience and has delivered high impact procurement and supply chain services to numerous private equity firms and their portfolio companies. Barnali has led and managed strategic sourcing initiatives addressing over forty spend categories and has extensive experience performing spend analysis, opportunity assessments, planning and executing competitive solicitations, conducting complex category strategic sourcing, and performing fact-based supplier negotiations. Barnali holds both a BA and an MA from Stanford University.
Barnali resides in San Francisco and enjoys traveling the world with her husband and daughter.