For most GPs, it’s a nightmare scenario: a portfolio company gets dragged into a burgeoning national scandal, with all the inevitable negative headlines and reputational damage that entails.
UK firm Lion Capital experienced this first-hand in February when Findus Group, a frozen food company in which Lion holds a 33 percent stake, was found to be selling beef lasagne made out of horse meat (several big food retailers have had similar problems). Although there was no evidence of the products putting consumers’ health at risk (tests ordered by the Food Standard Agency found no signs of the veterinary drug phenylbutazone), the howls of customer outrage suggest the brand damage could be substantial.
At press time, it still wasn’t clear exactly what went wrong at Findus; there has been some suggestion of foul play. (PEI asked Lion to contribute to this article, but the firm chose to go down the time-honoured PR route of declining to be interviewed).
Either way, however, it highlights the huge risks that complex supply chains can pose.
Usually, thorough checks are made during pre-investment due diligence. But that in itself is not enough, says Mike Lander, founding director of Profitflo, a consultancy that specialises in procurement. “What you need is reassurance throughout the investment cycle that what you found in due diligence is still the case.”
That’s particularly true since most firms are rushed during the due diligence stage, according to Mark Simmons, managing partner at Argon Operation. “When there is a tiered supply chain, there should be a cascading of responsibility through the supply chain enforced through contracts and through processes [post-investment],” he said.
If anything, the macroeconomic climate has increased supply chain risk in recent years. “It’s logical that in the current climate, people are driving to preserve their margins as best they can,” says Jon Gatfield, a senior director with Alvarez & Marsal. “But that increases the risk. And you have to compensate for that risk by being more diligent with your quality systems – almost intrusive – to check those risks are being managed.”
Switching to cheaper suppliers abroad can be a false economy, says Simmons. “[PE houses] like the savings … but there’s a cost and effort to manage a global supply chain. You need to ensure that you are managing your suppliers formally and informally. You need to visit them and audit them.”
Lander says his firm often advises clients to put a ‘change of control’ clause into suppliers’ contracts. “If a supplier company is bought by a third party, then the customer has the right to terminate the agreement. You wouldn’t want the supply chain being bought by companies that you saw as a competitor, or potentially increased the risk of supply chain failure.”