Private Equity firms
Private Equity firms

How shared service platforms add value to Private Equity (PE) firms

Shared services create value for private equity firms and their portfolio companies, fostering growth and offering a competitive edge.


In brief

  • Common shared services platforms help PE firms and portfolio companies harness synergies, reduce costs, improve efficiency and focus on core strategies, boosting enterprise value.
  • Portfolio companies can align with the PE firm and conduct a feasibility assessment to identify right-fit offshoring model.

Over the last decade, PE firms have been strategically directing their investments in high growth sectors like financial services, technology, and healthcare, seeking significant returns. Their emphasis has shifted from traditional sales and gross margin improvement initiatives to a more holistic approach focused on creating enterprise value and enhancing operational efficiency in their portfolio companies through standardization, optimization and offshoring strategies:

  • Standardization: Establishing consistent, efficient company-wide policies and procedures across business functions and core operations
  • Optimization: Streamlining operations by analyzing processes, identifying areas for improvement, and enhancing overall performance
  • Offshoring: Implementing cost reduction strategies by relocating business functions to geographies with lower operational costs and diverse capabilities 

Leveraging a centralized shared services model for PE firms and its portfolio companies offers an innovative approach for service delivery while fostering operational synergies. 

Selecting the right portfolio companies for shared services model

Private equity firms can evaluate the shared services potential of their portfolio company by examining it through a five-dimensional lens, comparing essential operational metrics with industry benchmarks. If any of the indicative metrics below show sub-optimal performance, it suggests a good match for the shared services.

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Shared services benefits for PE firms and portfolio companies

 

Shared services platforms offer significant cost advantages for portfolio companies by reducing the total cost of operations. Over a five-year period, projected savings include 50% to 60% through labor arbitrage, 10% to 15% through centralization and standardization initiatives, and 12% to 18% through automation and digitization. Additionally, portfolio companies gain access to a skilled talent pool from the Private Equity (PE) firm’s shared services, enabling them to optimize operations.

 

Streamlined governance, shared resources, and best practices improve operational efficiency, allowing companies to meet SLA/KPI benchmarks effectively. These platforms also foster innovation by facilitating workforce upskilling and technology sharing, which increases employee productivity and accelerates digital adoption. Furthermore, consolidating the vendor base and reducing reliance on outsourced vendors minimizes error rates and their associated costs.
 

Benefits for PE Firms

 

For PE firms, shared services provide access to a skilled cross-functional talent pool by leveraging shared resources across the portfolio. This approach enhances innovation by utilizing shared technology platforms and best practices, improving overall portfolio performance and operational efficiency.

 

Shared services also unlock new revenue streams through cross-charging models, where PE firms offer specialized services to their portfolio companies. Moreover, these platforms are strategically designed for scalability and future growth, employing a plug-and-play model that enables easy integration of new companies and services.
 

Process that can be transitioned to a shared services model

 

Core functions such as finance and accounting, human resources, information technology, procurement and taxation across industries have a strong potential for offshoring. A shared services model integrated within private equity (PE) firm’s shared services can unlock this potential, driving significant improvements in efficiency and scalability.

 

For financial advisory and investment firms, the shared services model offers unique benefits by tapping into the specialized resources and capabilities of the PE firm’s shared services. These includes domain specific roles like fund accounting, financial reporting, investor portal management, treasury etc. This synergy enables portfolio companies to streamline operations and focus on strategic growth.

Starting the shared services journey for PE firms and portfolio companies

A PE firm can undertake the following steps to build a shared services platform, typically requiring a setup time of five to seven months.

  • Define the strategic objectives of the shared services platform, ensuring alignment with the PE firm’s vision and the portfolio company’s goals
  • Conduct a feasibility study to assess the benefits and challenges of shared services versus dedicated models
  • Build a strong leadership team by assembling experienced PE leaders
  • Design a transparent cross-charging mechanism for shared services to highlight the value and cost savings for portfolio companies
  • Select a strategic location for the shared services, with a rich talent pool, cost and regulatory advantagess
  • Establish a strong governance model for the shared services
  • Start with a small pilot program offering limited services to a few portfolio companies, gradually expand to more services 

Case Study 1:

EY supported the end-to-end shared services setup and in-sourced operations for 150+ FTEs for a leading private equity firm, within six months.

Case Study 2:

EY assisted a Middle Eastern Public Wealth Fund in design of GCC structure that reduced operationalization time for portfolio companies by 31 months. The execution plan focused on diagnostics, design, and phased implementation.

Once the shared services platform is established by the PE firm, portfolio companies can embark on their offshoring journey by collaborating with the PE firm to conduct a feasibility assessment and determining the right-fit off-shoring model – shared services or inhouse dedicated center. 

Comparison between Shared and Inhouse dedicated center to choose the right-fit off-shoring model for portfolio companies is illustrated below

Category

Shared services

Inhouse dedicated center

Cost

Low upfront CAPEX 

High upfront CAPEX and OPEX

Talent

Access to skilled talent pool of PE firm’s shared services

Hire the new talent

Operations

Low lead time to stabilize operations

Higher lead time to stabilize operations; Offers more control and flexibility

Innovation

Leverage capabilities of PE firm’s shared services

New inhouse capabilities development

Partnerships

Leverage parent shared services partner ecosystem

Build a new of partner ecosystem

Maximizing value for PE firms using shared services

In conclusion, adopting a shared services platform can help unlock significant value drivers for Private Equity firms and their portfolio companies. By aligning shared services initiatives with the vision of the PE firm and the goals of each portfolio company, PE firms can enhance operational efficiency, implement cost reduction strategies and improve their overall performance. Successful implementation of shared services requires careful planning, feasibility assessments, strong leadership, and strategic collaboration. In the face of a complex financial and regulatory environment, leveraging shared services platforms is pivotal for delivering returns to investors and ensuring the long-term success of portfolio companies.

Summary

PE firms are increasingly leveraging common shared services/Global Capability Centers (GCC) model to strategically position their portfolio companies for sustainable growth and enhanced enterprise value. This strategic shift allows PE firms and its portfolio companies to achieve significant cost savings and operational efficiencies. As a result, portfolio companies are better positioned to thrive in an ever evolving and dynamic market.


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