‘Paging’ Mr. Cost Savings

Although its portfolio company was growing strongly, Partners Group didn’t hesitate to realize extra value by scrutinizing relatively small expenses

Private equity investors are fond of saying they “get their hands dirty” working closely with portfolio company management to improve operations. And yet, in reality, all are happiest when the companies seem to grow themselves and the job of creating value is, shall we say, easy.

It’s not surprising, then, that a private equity firm may forget to reach for its full value-add toolkit when growth is robust. After all, who wants to squeeze out nickels and dimes when dollars are flowing in?

Partners Group does, says the firm’s global head of business and financial services for its Industry Value Creation team, Lane McDonald. In an interview with Privcap, McDonald tells the story of a portfolio company that greatly benefited from a cost-savings plan, adding precious points of return to an investment that was already a home run.

Privcap: Can you think of an example of a deal that benefited from a careful analysis of expenses and a resulting plan of action?

Lane McDonald, Partners Group: I’ve never seen a company where there wasn’t an opportunity to pick up a few pennies and dimes on the ground; you can always run a little tighter, a little more efficiently. We had one world-class, top-line focused leadership team whose revenues had grown extremely quickly through organic and acquisitive growth. Typically, managing such growth usually takes up the bulk of management’s bandwidth, meaning there may be even more of an opportunity to tighten up. The pace of growth in this case was a signal to all of us that there was probably at least a point or two of efficiency or integration EBITDA that we were leaving on the table.

During our onboarding process, we decided to bring in an entry-level, right-out-of-college expense expert just to focus on field expenses. Within the first week, this person found that the company had been spending $30,000 a year on pagers.

Pagers? Was this in the ’80s?

McDonald: This was two years ago! We were shocked. What? We’re spending $30,000 a year on pagers? And, with a fine-toothed comb, we discovered a few things like that. Not inappropriately, the company had just paid its bills and focused on growth, but with a little extra effort, the expense professional found $400,000 worth of redundant expenses within his first year. The company had been moving so quickly that it hadn’t had time to really stop and breathe and take a look.

Did the cost savings have an impact on the performance of the investment?

McDonald: Our job in the Industry Value Creation team is to constantly be looking for that next level. And frankly, for the companies that are doing better, the efficiencies you can gain are that much more powerful, because quickly that $400,000 in cost savings that you found will multiply by eight, nine, 10, etc. when you exit, depending on your multiple. We ended up putting a larger program in place before we exited, and we found around $11M of cost savings all told, which, when you multiply it by the multiples that companies are going for these days, quickly becomes “real money.” So that’s the benefit of having a playbook of tactics that have paid off with other types of companies.

Beyond expenses, what’s another example of a value-enhancer that can be applied across portfolio companies?

McDonald: Pricing. With the advent of big data, the knowledge of customers has changed dramatically—be they B2B or B2C. There’s a lot of interesting things that you can do to flip the pricing equation on its head, to really make it a conversation about value rather than just a conversation about “Here’s how much it costs to make and here’s my markup.”

We’ve done a lot of projects around the efficiency of pricing, to pull that more through the revenue side. In partnership with the management team, we figure out what will be most impactful, what a company can digest, and what the field will adopt.