An Era of ‘Easy Money’ Comes to an End
The economic landscape that private equity (PE) sponsors face has shifted considerably over the last two years. For most of the last decade, the PE industry operated with the benefit of low interest rates coupled with a booming economy. In this environment, businesses with the potential for top-line growth found easy access to both equity and debt capital.
However, over the last few years, this lenient macro environment has shifted. Since early 2022, inflation spiked and the Federal Reserve embarked on an aggressive program of rate hikes. Following this action, the cost of debt capital increased substantially, meaningfully altering the economic benefits of larger leveraged buyout transactions.
These forces have combined to create the most challenging investment and funding market since the Great Recession. Due to this uncertainty, large institutional investors began to pause or pull back on new capital commitments, adding an additional burden to PE Sponsors.
Cost Management Strategies a Key Priority for this Next Cycle
With the task of raising and deploying new capital more challenging, PE sponsors are increasingly compelled to optimize the financial management strategies of their current portfolio companies. The ability to effectively manage portfolio company costs has emerged as a significant priority.
In this new era of expensive capital, the emphasis has shifted from new capital infusion and rapid growth to smart portfolio company spend management and bottom-line performance. PE sponsors are now required to have an even more discerning eye on every single dollar invested.
This shift from top-line revenue growth to EBITDA expansion through bottom-line cost savings requires the adoption of new best practices. Company functions that were often overlooked during periods of abundant capital must now come under greater scrutiny.
Spend management has taken center stage. CFOs and COOs, traditionally focused on portfolio company sales and revenue, are now diverting attention towards management company performance. Functions such as technology vendor management and procurement strategies have become a high priority.
Through effective spend management, CFOs can pinpoint savings, negotiate better vendor deals, and streamline procurement. Combined, these activities can lead to significant cost reductions and increased profitability and shareholder value. The era of considering back-office expenses as an afterthought is definitively over.
E78 Partners Can Help You Master the Data and Drive Shareholder Value
In order for PE Sponsors to make informed decisions centered on cost control, visibility and mastery of the data is vital. By having a clear and accurate view of all expenses, companies can identify potential savings and areas for optimization. With its service offering, E78 Partners was built to create visibility into these often-overlooked areas.
E78 Partners recognizes these challenges and aims to provide the necessary support for PE Sponsors and portfolio company management teams. E78 believes that most portfolio companies contain a tremendous amount of internal value waiting to be unleashed, often locked within bloated back-office technology budgets.
A New Era Requires New Strategies
The E78 team partners with PE sponsors and PortCo management, helping them navigate these cost challenges, providing strategies to enhance bottom-line growth. This focus on spend management not only allows companies to survive in this challenging macro environment but thrive, creating sustainable, long-term growth.
The macroeconomic shifts experienced since 2022 have fundamentally changed the approach required for PE sponsors to succeed. Top-line growth, while still important, is no longer the primary indicator of success. Now, a keen focus on cost and spend management is key.
Partnerships with experienced and knowledgeable service providers like E78 Partners can provide valuable insights and strategies to manage these challenges, unlocking value, and creating a path to enhanced EBITDA growth.