Private equity firms reduce staff at portfolio companies

Gala Coral, the struggling gaming company owned by Permira, Cinven and Candover, is not the only private equity-backed business cutting staff: a recent survey shows the vast majority of GPs are slashing operating costs to improve portfolio company performance.

Private equity firms are reducing employee headcount and freezing salaries at their portfolio companies as ways to survive the financial meltdown.

Around 90 percent of more than 100 senior level private equity executives surveyed said they have reduced workforces in their portfolio companies “in response to the current economic environment”, according to a survey from accounting firm RSM McGladrey.

Another 10 percent of respondents are considering reducing workforces, a move demonstrated this week by Gala Coral, a UK gaming company backed by Permira, Candover Investments and Cinven. The company said it is eliminating up to 300 jobs in a new round of restructuring as it looks to reduce its roughly £2.5 billion debt load.

About 83 percent of respondents said they were focused on managing working capital, while 75 percent said they were freezing salaries. The survey also revealed that seven out of 10 respondents are focusing on business process improvements, while 68 percent are working to reduce capital spending.

“Private equity firms are increasing communications and becoming even more engaged in the oversight of their portfolio companies,” Bob Jensen, RSM McGladrey partner and managing director, said in a statement. “Much of their focus is on helping portfolio companies acquire new customers, increase business with existing customers and enhance existing products and services.”

Of the funds represented in the survey, more than half have yet to close a deal in 2009. Fewer than 20 percent expect to sell a portfolio company, division or product line this year.

Respondents expect to face two difficult issues in closing deals this year: 57 percent said raising capital or acquisition debt financing would be tough, while 25 percent said they would face decreasing values of acquisition targets due to declining performances.

“The survey confirmed what private equity executives have been telling us privately: their attention has largely shifted from acquiring new platform companies to managing the profitability of existing platforms,” Hector Cuellar, president of McGladrey Capital Markets, said in a statement.

The survey covered more than 100 senior level private equity executives representing buyout, mezzanine and venture firms.