Executive Summary – The Case for Global Business Services (GBS)

Private Equity (PE) Firms Face Complex Business Challenges

In today's global economy, PE-owned Mid-Market companies¹ – those with annual revenues between $500 million and $2 billion – face significant challenges, including macroeconomic pressures, geopolitical uncertainties and rapid technological advances, all of which impact their market competitiveness and growth. Rising interest rates further pressure companies to optimize capital and operating expenses for higher multiples on investments. For PE-owned firms, these challenges are intensified by heightened scrutiny and EBITDA delivery of Limited Partners (LPs).

GBS Centralizes and Accelerates Strategic and Tactical Execution

To address these issues and ensure long-term success, many Mid-Market companies are adopting the GBS model. GBS centralizes management and delivery of enterprise-wide functions from R&D, Sales and Marketing, and more typically General and Administrative functions, such Finance, Human Resources, Legal Support, Procurement and Information Technology into a single organizational unit, promoting cross-functional collaboration, data-driven decision making, and innovation. This service delivery approach helps companies adapt to rapid changes, build resilience and reallocate resources towards growth. Although Mid-Market firms have been slower to invest in such comprehensive transformations due to limited financial resources and access to advanced technology, this service delivery construct offers a path for the PE deal and operations team to maintain focus, streamline operations and enhance deal efficiency, making it a strategic choice for overcoming their unique challenges.

A Force for Rapid Cost Take-Out and Value Creation

GBS significantly enhances EBITDA for portfolio companies (PortCos) by reducing operating costs and improving margins, ultimately driving higher valuations. Despite substantial upfront investment in setting up GBS structures, technology infrastructure and specialized talent, the returns beat the hurdle rate of 3.5X-4X which PEs target when investing in strategic initiatives such as GBS. Through cost optimization measures like labor arbitrage, centralized vendor management and streamlined processes, our study indicates that returns are realized within 12-24 months. Historical data shows that well executed implementations not only recover initial investments quickly but also provide long-term growth potential, with cost savings and operational improvements that can exceed 30%.

Conclusion

As the uptick in PE M&A deal-making starts, Mid-Market deal makers could proactively consider incorporating the GBS and GCC levers in their value creation strategy, incorporating the large-scale transformation benefits in the deal thesis.

Launching early post-close ensures benefits that accrue throughout the holding period. Further, GBS can become a foundation on which multiple platforms that enable business can be built. For example, GBS and Global Capability Centers (GCCs) can create an innovation platform that incubates innovation internally or through collaboration with startups and lead innovation adoption. Beyond that, they can build a strategic platform for further acquisitions and divestitures, for the PortCo, and maybe even the fund.

The PE funds in the market may opt to execute their GBS strategies in several different ways. Some will choose the Build-Operate-Transfer (BOT) model, while several may consider strategic stakes in emerging or Tier 2 service providers who have the skills and scale. In some cases, the fund may choose to set up its own captive operations with the requisite charge-back model for the PortCos. There are a multitude of models to execute from, and success of each one varies depending on management focus, investment thesis, and most importantly, the ability to govern effectively.

The key to success will be a clearly defined purpose for GBS and GCC aligned with the leadership backed by choice of the right operating and execution model orchestrated by the right talent.

Process design and technology will play a central role in the success of any GBS and GCC business case, with the advancing of platforms and the role of hyperscalers, will act as an enabler to drive even larger benefits and shorter time horizons to realizing them. The platform players will act in concert to build industry-specific solutions, specifically in areas such as AI-based applications using large language models, to perpetrate the need for centralized operating structures such as GBS.

Notes

      ¹ Globally, the Mid-Market segment is categorized based on annual revenue of portfolio companies, with three distinct tiers. The Lower Mid-Market (LMM) is companies with revenues between $25 million to $100 million. The Core Mid-Market (CMM) ranges from $100 million to $500 million, and Upper Mid- Market (UMM) ranges from $500 million to $2 billion.