How Two Global PE Firms Do Pooled Purchasing

As chains like Costco and Sam’s Club have shown, buying in bulk can save money. The same concept is used for cutting costs in private equity firm portfolio companies.

Jonathan Kinney, managing director, Strategic Analysis & Sourcing at The Riverside Company, has been working on the global firm’s pooled purchasing since 2004. He says that Riverside has anywhere from seven to 10 programs at a time involving pooled purchasing. Most of the time, a company will be made aware of this benefit before becoming part of the Riverside portfolio.

“Our goal is to try to provide savings and service levels that our companies couldn’t attain on their own outside of Riverside, so they feel the benefit of being in our portfolio and programs right away,” he says.

Riverside buys small companies but has a large portfolio, which leads to leverage. “After they’re acquired, we get into the specific benefits of each program, measuring savings and the service level impact of switching [to the pooled purchasing],” Kinney says. “Usually, by the time we get to this point—especially to the savings—there is excitement to join by the companies.”

There is also a pooled purchasing program at Partners Group, the Switzerland-based global private markets investment manager. Fredrik Henzler is co-head, Industry Value Creation, and was previously founder and partner of a consulting company for procurement and supply chain optimization, building up the private equity portion of his practice over six years working with GPs in Europe.

“What is interesting is, the overriding reason most people start looking into pooled purchasing is to gain benefit of scale,” Henzler says. For example, instead of one company buying 5,000 units of printer toner a year, portfolio companies together could buy 100,000 for a better price per unit.

Unlike in PE firms that primarily have a U.S.-based portfolio, health insurance isn’t a focus of pooled purchasing in Europe. Henzler says that at Partners, one of the common starting points is information technology. “Everyone needs laptops, printers, displays—these are very comparable across companies,” he says. Aside from IT and related expenses, the second-most-common categories that Henzler sees pooled are miscellaneous office spend like materials and consumables.

Kinney says most of Riverside’s pooled purchasing programs involve indirect spend such as insurance, shipping, office supplies, and IT supplies. Manufacturing and distribution companies usually have the most spend and the most savings, he says.

“We had three enrollments in our insurance program, and each saved more than $100,000 per year,” Kinney says.

The total savings percentage on all pooled purchasing programs is a little more than 14 percent at Riverside, he adds. If health insurance, which has the most dollars spent but a lower savings percentage, is excluded, that jumps to about 25 percent.

Henzler says that he’s seen up to 40 percent savings in certain spend categories, but the minimum they expect at Partners is 15 percent. “If the cost savings are lower, we wouldn’t initiate the program,” he says. “We would wait for the next opportunity rather than save 6 percent.”

Partners Group is a global mid-cap investor, with the portfolio scattered among emerging markets, Europe, and the U.S., making it impossible to have a portfolio-wide pooled purchasing program. “It’s just too large a geographic dispersion,” Henzler says.

Riverside has more than 70 portfolio companies across four continents, and Kinney’s team is always looking for pockets of leverage to create savings.

“We’re monitoring the implementation process, staying on top of contract renewals and the bid process,” Kinney says. “There’s someone at Riverside to call to deal with these things. We try to make it very easy for companies to participate and see the benefit.”