For the majority of PE-owned companies, cash is burning faster than it has in the past few years if not longer. Private Equity sponsors have leaned-in to support their companies by providing more equity; however, it’s unlikely sponsors are interested in re-upping any further. What worked before, won’t work now, and “more of the same” has just never been a successful strategy for any type of company.
The first half of 2024, conventional growth strategies are being limited by a shortage of resources, the elevated cost of capital, customer-discounting, supply chain disruptions, and a host of other day-to-day challenges, which are further complicated by operating capacity and cost issues.
In the face of those challenges, portfolio companies (portcos) still may face ongoing maintenance requirements and a need to make improvements just to maintain their current competitive positions, let alone enable growth. Funding for those requirements, when the PE firm is not offering any more additional funding and interest rates are high, is difficult – but not impossible.
Achieving significant benefits from alternative, sustainable funding from within
Funding does not have to come from the usual sources. It is possible for a portco to create its own source of funding from within by improving cash flows and realizing opportunities for savings from current operations and supply chain improvements.
SGS Maine Pointe has been working with multiple portcos to identify their problems, both operationally and from the financial funding perspective, and then find and execute solutions for value creation which are needed to remain competitive and improve EBITDA and cash flow. Taking a total value optimization (TVO) approach across the end-to-end supply chain and operations enables companies to achieve significant benefits without additional borrowing or PE funding, namely:
- Measurable Impact: Initiatives deliver significant and sustainable EBITDA, service and cash flow improvements.
- Financial Certainty: Improvements are measured continually, signed off by the client and underpinned by a 100% guarantee of engagement fees based on annualized savings.
- Risk Mitigation: By aligning fees with quantifiable savings, companies can mitigate risks, overcome cash shortages, and sidestep the high cost of debt, while correlating payments with cash flow. In short, these initiatives de-risk supply chain and operations initiatives.
- Long-Term Value Creation: Taking a total value optimization (TVO) approach builds a competitive advantage, upskills procurement, operations, and logistics functions, and captures long-term gains.
Bottom-line benefits in the real world
It’s not just theory. Real-world examples illustrate the impact of TVO initiatives and how companies can benefit significantly.
In the case of a PE-owned chemical company, a TVO approach was taken to address multiple operational issues and financial constraints. We de-risked the company’s financial commitment with our 100% guarantee of engagement fees based on annualized savings. After executing on new initiatives, the company was able to better align its payments with renewed cash flow.
In another example, a pharmaceutical company which was newly acquired by a PE firm achieved operational and capacity savings of between $30 million and $60 million, through improved operational efficiency, while implementing a sustainable framework for the future with a new make vs. buy framework.
Additionally, a paper products company undergoing ownership changes came to us for help, resulting in the implementation of a new strategic procurement initiative that increased EBITDA 45%, and saved up to 27% by category. In addition a cash impact of $1.98 million was gained, resulting in a 6:1 ROI for the engagement.
Don’t wait for funding that may never come. Take action now!
Portfolio companies and PE firms facing cash shortages and tight budgets can take a number of actionable steps that are crucial for maintaining EBITDA and paving the way for long-term success – and they can be achieved even with limited resources.
- Optimize Working Capital: Adjust inventory levels, optimize payment cycles with suppliers, and accelerate customer payments.
- Prioritize Operational Initiatives: Identify areas for significant EBITDA or cash improvements and align initiatives with sustainable results.
- Enhance Stakeholder Engagement: Incentivize key stakeholders to drive strategic initiatives and improve financial performance.
- Implement Total Value Optimization: Conduct a comprehensive assessment of planning, procurement, operations, and logistics to identify areas for improvement and enhance overall efficiency.
- Leverage Data Analytics: Utilize data analytics to make informed decisions and drive meaningful improvements in operational performance.
If you would like to talk to Dan about any of the points raised in this blog, contact him below.
