2020 Private Equity consulting trends
Zhibek Valevka, Associate at Odgers Connect, speaks to independent consultants Toby Tarczy and Phil Carrivick about the trends emerging for consultants in private equity
As the PE market has become increasingly competitive, firms are being forced to find their advantage – an edge that will leverage their services above and beyond others in the field. Firms are pitting themselves against others to win bids, grow their portfolios and enable creation of value. In both pre and post deal scenarios, funds are seeking out the advice, research prowess and strategic planning from independent experts. Independent consultants are highly experienced and specialised one-person bands who can deliver flexible and tailored projects to leverage a firm when contending against competitors and to grow a portfolio company effectively.
I spoke to Toby Tarczy and Phil Carrivick, both highly experienced and specialist independent consultants about the trends they are seeing for independent consultancy projects in the PE space.
1. Investment in technology and cloud systems
Unlike other sectors where there has had to be quick evolution to adapt to rapidly developing technological advancements, private equity has been slow on the uptake of digitalisation. There has been little investment in upgrading legacy systems that are outdated and cumbersome. Toby told me that, “in today’s world of highly advanced and complex technology, the likes of AI, sophisticated SAP and others, there is a level of automation and deep insight produced from data intelligence that leverages a company beyond its competitors”. He went on to say that, “although the opportunity is there, a lot of firms are running on unfit-for-purpose legacy systems”.
For PE, the introduction of cloud technology can not only streamline operations but enhance and centralise back office functionality. Importantly, the use of systems such as Salesforce that build a ‘financial dashboard’ visually representing changes in data points such as revenue generation allows for consistency across the organisation and the portfolio companies. Toby warned of the risk involved in not upgrading systems to have the capability to correctly handle data and emphasised the detriment of this to business by stating that: “Businesses with legacy systems should be discounting their services for lack of a strong data structure”.
As it is becoming a business standard across industries in 2020, we will be seeing a growing number of firms looking to update their systems, requiring specialist support in sourcing the cloud technology and implementing it organisation-wide through digital transformation.
2. Advancing data management and business intelligence (BI)
A critical factor in implementing a new digital platform is the data functionality. As firms go through the digital transformation process, there must be steering on what data points to handle and how that can be used productively to generate actionable insights.
Data analytics is fast becoming a necessary component for PE firms in pre-deal due-diligence and for post-deal analysis of portfolio companies as they develop and grow. Phil told me that: “Five to ten years ago, advisors used to preface their findings with “in my opinion”, but now we are able to say, “we’ve crunched the numbers” or “the data modelling has told us this”. In-depth data analysis is giving rise to objective insights backed by the stats and figures.”
For this to be a successful transformation, firms need to have the right data management in place. In the initial planning stages of transformation, PE firms must be considering how to derive the most out of the data and asking what more it can do for pre and post deal processes. Hiring an independent, external consultant allows there to be someone to look at the bigger picture and advise on the extent to which data can be applied to grow and develop the firm and their portfolio companies.
This starts from cleansing the data to ensure there are no errors from data collected previously. Toby called this “swiss cheese data”, explaining that data sets with holes and inaccuracies are worthless and can’t be used to extract meaningful insights. A specialist data consultant can be hired for a small-scale project to straighten out and advance a firm’s data set to supplement the introduction of a new data management and analytics system.
3. Culture change
There needs to be a change in mindset and behaviour in order to fully benefit from increased data and insights. Toby made the point that PE firms have to be driving the portfolio transformation, not just sitting back and expecting to see results, saying that: “PE firms are the ones holding the bag at the end of the day, but they tend to be hands-off. This is an opportunity to go in and be active.” He expanded on this in reference to our conversation about cloud technology, telling me that, “real time information facilitates immediate reaction”.
Especially in this climate with longer holding periods, there is the opportunity to see vast transformation and push the value creation plan. Driving value through data-led decision making requires a change of mindset for the PE firm. A cultural transformation must be diligent, working in conjunction with the new processes to support colleagues in embracing the new working style. This piece of work requires someone adept in digital transformations who can build and successfully implement a plan for organisation-wide culture change.
4. Market and competitor insight
On the pre-deal side, the market and competitor dynamics can be identified and quantified to form revenue and cash flow projections, hence the present value for the company. Phil warned of the market state currently, saying that “we are in a more volatile economic environment with fast changing markets, that require an expert to analyse and these findings can then inform strategic decision-making”. I think this is a fair and timely statement considering what alone has taken place in the past couple of weeks with the impact of COVID-19.
PE firms need to be meticulous in their commercial due diligence in order to mitigate against risk in the acquisition of a portfolio company. Market modelling can be done with a strategy expert that is able to produce scenario plans covering potential market conditions going forward with a company. The work comprises of two situations: best case and worst-case scenario. Modelling the market with the help of an expert consultant gives the PE firm a more thorough understanding of what they could be up against and can be a critical factor in entering a bid process.
5. Management of growing customer volatility
On the pre-deal side of PE work, Phil told me that, “market volatility is accompanied by instability with the customer base, which has in turn added another factor to the due-diligence process”.
PE firms need to add this activity into their basic protocol pre-deal to have detailed oversight and understanding of the customer base of the portfolio company. Bringing in an independent consultant to conduct this work gives bespoke, detailed analysis, in Phil’s words: “Independent consultants can go to the next level; they can do the interviews with ex-directors and industry old-hands to get the insights that are game changers”.
For more information please contact Zhibek Valevka.