Digital transformation in the PE space

April 2021  |  FEATURE  |  PRIVATE EQUITY

Financier Worldwide Magazine

April 2021 Issue

Digital transformation is occurring rapidly across many industries. The private equity (PE) industry is not immune to this trend and will continue to be revolutionised by technology going forward.

Competition within the PE space is fierce, and firms are always looking for new ways to boost returns. Digital transformation can provide improvements which drive operational value creation.

The issue has climbed the agenda in recent years as PE firms seek to boost growth, manage risk and reduce operating expenses. Technologies such as robotic process automation (RPA), AI and the internet of things (IoT) can have a profound effect on value across a portfolio. According to EY, digital transformation helps drive operational value creation for PE firms of all types, regardless of their sector specialisation, geography, strategy or size.

Change in the PE space is nothing new. Undoubtedly, the industry has never stopped evolving, particularly since the disruption caused by the global financial crisis of the late 2000s. Arguably, PE is primed for transformation.

Insights and automation

Data volumes and computing power have exploded in recent years. Big data and analytics can be utilised to gain new insights, such as a better understanding of customer behaviour trends, allowing PE firms to build roadmaps for future returns. Leveraged properly, digitalisation is an instrument for value creation, growth and business model optimisation.

Firms are tapping into the benefits promised by digital transformation. According to an Intertrust survey, over 90 percent of PE firms believe that artificial intelligence (AI) is likely to have the biggest transformational impact on the sector. Thirty-seven percent said that blockchain, AI and robotics are already being adopted in the industry and will become more widespread in the near future.

Fifty-six percent believe digital innovation is currently having the biggest impact on the back office, generating greater operational efficiencies. And 37 percent say innovative technology is being deployed to speed up the due diligence process when completing transactions.

With digitalisation creating value for PE firms, many are recruiting chief information officers (CIOs). A CIO can help develop a tech-driven approach vital to ensuring prosperity in the digital economy. They are able to assess the digital maturity of a portfolio company and, if required, lead the hiring of a CIO or chief data officer (CDO) within that portfolio company to facilitate further transformation. Going forward, PE firm CIOs will be under increasing pressure to oversee the firm’s growth from a technological standpoint, while also creating value through operational improvements.

Reacting to crisis

Due to the COVID-19 pandemic, PE firms have had to quickly adapt to the ‘new normal’. They have made efforts to salvage parts of their portfolio negatively impacted by the crisis and to capitalise on new trends. Technology has had a key role to play in assessing the landscape, and will continue to do so as the global economy moves through the ‘recovery’ phase.

Greater digital integration can be highly effective in improving efficiency and earnings. According to West Monroe, PE firms with a clear digital vision in place are more likely to boast strong growth rates and higher profits, which will be crucial if companies are to get back on their feet once the pandemic has passed.

Exits

While digital disruption can improve day-to-day operations and management decisions, it offers benefits further down the line when it is time to exit a portfolio company. Greater digital and technological integration can improve the chances of achieving an exit.

Half of PE firms include digital value creation as part of their investment thesis, according to West Monroe and Mergermarket, and more than eight in 10 firms said they view mature digital investments into a portfolio company as a value driver at exit.

Investment

All signs point to the PE industry ramping up its investment in digital technology over the coming months and years. Those that can exploit the vast quantities of available data will enjoy competitive advantages.

To develop the operational frameworks necessary to manage internal transformation, organisations require a well-designed strategy led by an aligned and engaged team.

However, more work needs to be done. According to West Monroe and Mergermarket, only 42 percent of PE firms report having a standard definition of ‘digital’ that guides strategic decisions and aligns all parties. Additionally, 40 percent say half or fewer of their portfolio companies have a documented digital strategy.

There are, of course, financial considerations to digital transformation too. It can be expensive to digitalise operations, as systems and technicians tend to be costly. But the enhanced efficiency and potential for revenue growth that greater digital transformation can provides means, eventually, investing in it may not be an option.

© Financier Worldwide

BY

Richard Summerfield