Need To Know

Pooled purchasing might finally be gaining traction as private equity firms work overtime to squeeze every last savings out of their portfolio companies.

Employing this particular cost-cutting measure—basically, sharing expenses for everything from raw materials and stationary supplies to health care coverage among portfolio companies—seems to make almost too much sense. But the practice has only lurked around the edges of the private equity world since the beginning part of this decade. A new white paper from tax and advisory services provider Grant Thornton suggests more firms are taking notice.

A prime area where private equity firms can find savings is health care. And that’s good news because the cost of coverage continues to rise. The average corporate health benefit expenditure in 2009 will be $9,660 per employee, an increase of 6 percent over 2008, according to an annual survey from risk management consultant Towers Perrin. The Grant Thornton paper quotes an executive with UnitedHealthcare who works with private equity firms as saying they can save an average of 12 percent annually on health care costs when using a pooled purchase plan.

A number of buyout firms have already gotten in the act. One is The Riverside Company, which started a health insurance pooled program in 2003. Chief executives and CFOs of the lower mid-market firm’s portfolio companies meet annually to discuss best practices, issues and concerns, and the buyout shop has since gone on to set up pooled purchasing programs in other areas as well, including small-parcel shipping and telecommunications. It estimates the programs help it save 14 percent on average across its 52 portfolio companies in the United States.

Executives at Irving Place Capital have identified 50 categories of spending—including telecommunications, office supplies and temporary labor—common to each of the firm’s portfolio companies. The New York-based shop estimates pooled purchasing will save its portfolio a total of $47 million in 2009. Chief Executive John Howard told Buyouts his firm uses its pooled purchasing practice, which it implemented three years ago, as an enticement for target companies. “When we’re looking at a new acquisition we can go in and ask what they pay for the following stuff, and we can figure out how much money we can save them by locking them into our system,” Howard said.

The next phase of pooled purchasing could be firms partnering up with one another to pool costs across their respective portfolios. The Blackstone Group, which saved $150 million for its portfolio companies by volume purchasing health care, is reportedly already doing it.

The difficulty, especially for smaller shops, is having enough manpower to implement the changes and getting management of the various portfolio companies to sign on.