The term private equity (PE) firm not only sounds sexier than “buyout firm,” but it also better reflects the changing nature of such firm’s activities. Before the financial crisis hit in 2009, PE firms were not unlike residential home flippers: find an undervalued house, make “the deal” (often hugely leveraged), improve it, and sell it at a profit … quickly. The difference, however, was that the PE deal makers mainly used someone else money. After the financial crisis, loans and leverage doesn’t come that easily anymore and the task of PE is moving towards making “true” improvements and often holding on longer.
In the good old days, the majority of PE action involved financial restructuring and beautification of the balance sheet and make a profit, sometimes in a few months, without getting deeply involved in the business. Now, the focus is on operational restructuring and improvements. Two typical activities involve changing the people (HR reorgs) and improving the operations. (Changing product and brands often takes too long for a PE firm’s time scale.)
Last week, Kevin Roose reported in the New York Times on how PE firms like Blackstone “are using their size and scope to pressure suppliers, set their own prices and exert their influence in a range of industries, including health care, construction and consumer goods:“
Last year, Blackstone was part of a group of companies that collectively bought 16 million reams of copy paper, 35 million FedEx shipments and 900,000 days’ worth of rental cars from National and Avis.
“We have incredible leverage,” said James A. Quella, Blackstone’s North American head of portfolio operations. “The more volume we have, the lower our prices go.”
The private equity titans have huge economic influence and sway, largely because of the size of their portfolios. Blackstone owns all or part of 74 companies that employ 700,000 people and generate $117 billion in annual revenue. Taken collectively, Blackstone’s businesses would rank as the 13th largest company by revenue.
This seems like a welcome byproduct of the change of the times: the smaller individual companies (“entities”) get access to suppliers and services on the same terms of a 10 or 100-fold larger company. The changing focus to providing “true value” (by which I mean improving true work, which equals operations) also increases the value of operations and supply chain management knowledge. And that is good news for operations professors and for MBA students!