Unleashing Potential: Private Equity’s Pivot to Small Businesses and Its Impact on Staffing
Private equity (PE), the largest private asset class in the US, has begun to shift its focus from what we have come to expect them to invest in. Recently, there has been a significant increase in PE investment in smaller companies - 61% of deals in the past year, up from 50% the previous year. But what’s really interesting is where these investments are landing and the impact that they will have on staffing. The focus has moved onto what is known as the main street economy, which includes small-scale enterprises like dentists, lumber yards, or car washes. Due to the size of PE and the power that trillions of dollars of investment potential has, this change in investment strategy is will to have a significant impact on the entire economy. Let's delve into the reasons and potential consequences.
Why the Change in Strategy?
Several factors are at play. Interest rates have been rising, which has not only prompted more creative investment strategies, it has meant that a company with a few locations may not be able to afford the money they need to expand. In the past, it was feasible to leverage your 3 existing locations with the goal of reaching 5, 10, or even more within a short period of time; the rate increase has made this much tricker. Further, the past decade of PE focusing on large leveraged buyouts of tech firms has left a thin market for companies that have not yet sold but are open to it.
In response, PE firms are tapping into the potential of smaller businesses. Known for their patience, PE firms are not looking for quick turnarounds, instead, they invest in efficiencies, innovation and operational upgrades. Take a small dental clinic, for example, it likely won't be using the most sophisticated operational, financial, or marketing practices, but a PE firm can acquire small firms in bulk, leverage size to build brand equity and secure better deals on tech, whilst bringing on expert back-office staff at a centralized location who can have a huge impact on the company.
The Power of Roll-up and Centralization
The strategy isn't new. Notably, mega-advertising-agency WPP followed a similar path in the 80s and built a hugely powerful, resilient and still critically acclaimed company. By acquiring numerous businesses and centralizing complex tasks, PE firms can consolidate operations and use all of the knowledge and skills they developed in big-tech investment to change the game in these traditional industries. Imagine, for instance, having a single back end across 200 acquired dental surgeries; the economies of scale alone can bring significant benefits.
The Impacts on Staffing
Whilst we have largely spoken about technology and scale leading to the new efficiencies, the staffing ramifications are significant. Critics like Elizabeth Warren have likened PE firms to vampires due to their agressive cost-cutting and seemingly indifferent attitude towards the long term success of businesses they acquire. Whilst this is certainly true for some PE firms, the reality is far less black-and-white. One key staffing stat is that post-acquisition, the average PE company sees a 13% reduction in headcount within two years; this is a negative effect of the hyper-efficient model that PE looks for, and it cannot be denied that in the short-term investment reduces the volume of employment opportunities.
On the other hand, the transition will also increase the demand for more sophisticated roles in areas like cybersecurity, finance, HR, operations, and marketing. I the traditional main street small enterprise, these roles will be outsourced or typically performed by people with less experience. Once the group starts to build and the machine of scale begins to spin, the demand for senior-level staffers in these toles will be in higher demand.
A Glimpse into the Future
While there might be initial job losses, the long-term effects could be immensely beneficial for all parts of the staffing sector. Increased efficiency often leads to more demand for delivery staff and reduces costs, making services more accessible to a broader customer base. This could potentially lead to more locations, more staff needed at every location and a significant boost in hiring at every level post the 2-year adjustment period.
We can take a lesson from McDonald's, which saw a similar situation unfold when it introduced self-serve machines. While it initially sparked concern among employees, it eventually led to increased efficiency. This allowed McDonald's to sell more burgers than the traditional counter model, leading to a significant rise in the kitchen staff's average headcount.
Private equity's shift towards smaller businesses could indeed change the staffing landscape, with initial job losses but potential for increased job opportunities in the long run. As a staffing firm, we constantly look to stay ahead of these trends, and advise people on how they can best position themselves for the next switch in industry. The challenges are substantial, but so are the opportunities for people to make a difference.
