With deals slowing, private equity firms are putting their resources into making the companies they already own more profitable, or what they like to call, “value creation.” Now, consultants want to catch up.
Ernst & Young, for example, plans to hire technology consultants and operational directors, as well as acquire boutique firms with expertise in supply chain management and improving environmental, social, and governance performance, according to Bridget Walsh, global private equity industry market leader at EY.
The investment in human capital and boutique firms is part of EY’s plan to expand its private equity services. In June 2022, the company announced a $1 billion investment over four years to improve its PE capabilities, mos of which are aimed at helping PE firms maximize profits from companies they own.
“We are in that mode of private equity at the moment that when [PE firms] buy the asset, they are much more interventionist,” said Walsh. “Traditionally, we [helped] with the deal, the financial and tax diligence, the commercial due diligence, the tech, the strategy. Increasingly we are seeing [the need] to build out further our operational capability and to stay with the deal all the way to exit.”
PwC made similar moves in the past year. The company bought two smaller consulting firms, Sagence and Pollen8, to assist private equity firms’ portfolio companies in their digital transformation efforts. According to PwC’s private equity lead Manoj Mahenthiran, the company is very focused on leveraging cloud and other digital tools to help PE firms with post-acquisition management, such as improving the operational efficiency of portfolio companies and growing their revenue with new products and other expansion strategies.
“The private equity business model keeps getting democratized,” said Mahenthiran. “You buy a business, you take some costs [down], and you do a roll-up. More people are learning how to do this, so now you need to come up with a much more unique way to create value.”
In the near future, PwC plans to acquire more consulting firms with a focus on helping companies with their digital transformations, according ot Mahenthiran. He believes consultants play a crucial role in helping PE firms generate profits from their existing portfolio companies, especially when it comes to a niche area like cloud technology.
“Privaty equity funds are not consulting firms,” he said. “The pace of technology changes so fast…and in order for PE firms to build their own teams [focused on technology], they have to build a mini consulting club.”
“Most private equity-focused consultants right now are trying to figure out how to get into the value creation business,” said Sean Mooney, founder of PE consulting and solutions provider BluWave. The bigger part of PE consultants’ job used to be focused on buy-side activities, such as identifying acquisition targets and conducting due diligence, he said. “Now, the deal market has cycled down, so all their [resources] suddenly are very underutilized.”
But Mooney added that the bigger consulting firms tend to lack focus on their value creation strategies. “I’d say specialized consultancies who are spending more time being better at fewer things will win,” he said.
