Digital transformation for private equity firms
Jon Sasserath, Head of the Digital Transformation Practice at Odgers Connect, discusses how private equity firms are increasingly investing in digital transformation, pre and post deal, in order to create value from their investments
Despite global and local economic uncertainty, the UK and European private equity market is still buoyant and there is dry powder to be deployed. However, with arguably less deals to be done, valuations have increased and competition is fierce. Despite the market expanding with increased investment and portfolios multiplying, there has been slow change to the traditional PE model. Many funds however are now advancing their digital capabilities, making it a new business standard and imperative; those that are not adapting are falling behind and losing out to competitors that have the technological capabilities to move quicker, with more efficiency and to capture the market with data-led market insights. From research of investment opportunities through to financial reporting, PE could be developed digitally to vastly improve performance.
With digital therefore acting as a value creation enabler, a trend is emerging in the PE space where firms are incorporating a chief information officer into their investment modus operandi. By having an in-house CIO, firms are able to develop a tech-driven approach with data capture capabilities – essentially adding digital due diligence to the decision-making process. The position can work two-fold: building a precise technical ecosystem to enhance the PE firm’s performance; and providing the opportunity to act as a unifier across the digital functions of the portfolio companies. As digital transformation becomes one of the top priorities post-deal, there should be a standardised methodology, or a ‘playbook’, developed by this business-focused, technology leader for how to go about transforming the organisation’s technology infrastructure. The role also enables the expert assessment of the digital maturity of portfolio companies and, if required, the hiring of a CIO/CDO into the c-suite of the portfolio company specifically to achieve growth.
This role could also be on a more temporary basis. PE firms need change agents that can quickly lay the groundwork and introduce the CIO/CDO role into the firm before such a leader is permanently appointed. There are also opportunities for consultants in the initial post-deal stage to advise on a digital roadmap for optimising operations by undergoing a digital transformation. This approach will enable specialised expert insight to develop a strategy for long-term value creation without hiring a permanent c-suite employee.
The due-diligence process pre-deal is expanding. The traditional commercial and financial due-diligence is being accompanied by people analysis and now there is a case for a digital component of the process. Broadening the research activity will give a greater understanding of the operational state of the company, whilst including their digital capabilities pre-deal is a critical addition to the information required for building the value-creation strategy. Planning for how to expand and improve these core business areas could give PE leverage over their competitors in the bidding process.
From a post-deal perspective, one major change that is having a distinct impact is that with a more turbulent market, hold periods are elongating, often up to 7-10 years, creating a need to do more to the company before selling. This has meant the overall aim of investment is shifting from increasing asset value to increasing profitability. Digital transformation will not only bring about the profitability objective, as the capital growth ultimately increases from higher market position generated from digitising, but it can reduce hold period length.
The process of digital transformation in private equity is becoming critical to driving the technological progress of the firm and expanding its capabilities in the digital era. The impact of hiring a CIO goes beyond the firm itself, but importantly adds exceptional value to the portfolio companies. Firms should be concentrating efforts on digital transformation as this is the quickest way to see the direct improvement of a company; ultimately, streamlining processes, automating, and easing communication lead to increased productivity and profitability.
For more information, please contact Jon Sasserath.