The goal of a private equity firm is to purchase a company, invest in its growth and garner a profit for investors by selling it to a larger interest, typically within three to five years. But they must also focus on adding value to assets and investor relations in this short time period.
Private equity firms have conventionally charged investors a fixed management fee of the total assets under management. However, with the traditional AUM model undergoing increasing strain, firms are looking for alternatives that can bring down costs without sacrificing efficiency.
More private equity firms today are recognizing that they can reduce costs by outsourcing the administrative operations of their portfolio companies. This means a bigger percentage of management fees can be booked as the fund profits or more returns to limited partners.
Outsourcing is also appealing to private equity-owned companies because it allows things to be done more quickly, in keeping with their short turnaround time. Functions that private equity is outsourcing include IT, HR, customer service and finance.
According to EY podcast What private equity is outsourcing to create value, “typical savings that we see,[are] anywhere from 5%-10% on the low end and all the way up to 30%+,” said EY-Parthenon US Value Creation Leader Gregory Schooley, in reference to private equity firms that outsource.
Benefits of outsourcing for private equity firms
Outsourcing routine business functions also helps private equity firms reduce the cost of operations of their funded companies but without hiring more people. In a sense, the outsourced staff can be considered an extended team working on a plug and play basis.
An outsourcing partner can help private equity portfolio companies by:
1. Providing cost savings versus hiring internal resources.
2. Increasing returns through sustainable investment strategies.
3. Reducing cybersecurity risks.
4. Providing information about the latest trends and changes to the regulatory landscape.
5. Delivering timely and accurate financial reporting, data-driven insights and portfolio value.
6. Implementing operational best practices.
7. Deploying tools and tech to oversee larger volumes of data, and training staff how to use it.
8. Providing easy access to experienced professionals.
9. Freeing up internal resources to focus on strategic tasks that grow revenue.
10. Making it easier for you to expand or scale.
| Talk to us about how Escalon’s experienced Essential Business Services can help your private equity firm create value. |
Types of outsourcing services for private equity
With ever-changing regulatory and investor requirements, a portfolio company requires accurate, timely financial information to gain a competitive advantage and deliver value to investors. An outsourcing partner can provide private equity firms with an end-to-end operating model that best serves the future business needs of their portfolio companies.
Following are the seven types of services that a private equity firm can outsource:
Professional outsourcing
– Encompasses specialized services like accounting, bookkeeping, digital marketing, and other complex, repetitive business activities.
IT outsourcing
– Provides a variety of IT operational and infrastructure management. With IT outsourcing, you gain IT support for maintaining data security, keeping licenses up to date and developing apps or websites.
Process-specific outsourcing
– There are three types of process-specific outsourcing.
• Knowledge process outsourcing for improving products and services through research and data analysis.
• Recruitment process outsourcing to hire, train and retain top talent. You can get support for job postings, shortlisting applications, background checks and creating an employee handbook.
• Legal process outsourcing to manage regulatory compliance, litigation and other legal needs. With LPO, firms can keep their legal spending to a reasonable amount and get the insights they need for investors and regulators.
Business process outsourcing
– Manages repetitive daily business operations, such as administration, customer service and lead generation.
Manufacturing outsourcing
– Helps meet increased demand for products with limited in-house resources. It also helps businesses save funds to regularly update equipment.
Project outsourcing
– Businesses can also outsource a particular project when they lack the time, skills or funds to otherwise complete it. This may comprise projects such as website redesign, content creation, tech-related functions and running marketing campaigns.
Financial outsourcing
– Professionals specializing in financial reporting, accounting, regulatory and compliance services provide their services. Outsourced finance service providers can also implement technology and tools to help your portfolio companies improve outdated systems and increase productivity.
What should a private equity firm look for in an outsourcing partner?
According to capital marketing company Ocorian, a general partner’s decision whether to outsource boils down to three factors. These include “evaluating the real cost of running their business; anticipating the impacts of changing regulatory and investor requirements; and choosing an effective end to end operating model that best serves their future business needs.”
Before finding an outsourcing partner for your portfolio companies, carefully investigate their reputation. The right outsourcing partner should drive value across all aspects of the business.
Here are the four key factors private equity firms should assess in an outsourcing partner:
• Level of expertise, experience.
• Record of investment in innovative tech, systems.
• Robustness of their operating platform.
• Testimonials.
Want more?
Escalon supports private equity and their portfolio in a diverse range of industries and stages. Our customized services can help scale your business from close to exit. Talk to an expert today.
