Private equity firms are increasingly looking to digital transformation to create value and remain competitive in an ever-changing market. The digital transformation process revolutionizes companies with a range of innovative tech: big data analytics, artificial intelligence, machine learning, the Internet of Things, blockchain, cloud solutions, Software as a Service (Saas), cloud computing, and more. Relative to other industries moving toward digitalization, private equity firms have been considered late movers with the exceptions of large firms, like Blackstone and The Carlyle Group, who have given themselves an edge with the early interest they’ve taken.
Traditionally, PE firms have made investment decisions based on cyclical data sources such as quarterly earnings, financial reports, tax filings, etc., that could be limited in terms of scope and frequency. With increasing competition in the private equity sector, digital transformation provides an opportunity for firms to make real-time assessments and avoid falling behind the competition.
Specifically within private equity, firms seek to leverage these technologies to improve operational efficiency, streamline processes, and enhance the overall value of portfolio companies. Along with the improvement of portfolio companies, firms applying these technologies internally position themselves as well as possible to adapt to the quickly changing, increasingly competitive standards that are being called upon for survival in the private equity industry.
This blog post will highlight best practices that PE firms can utilize during the digital transformation process and analyze the value-creation opportunities that forward-thinking firms can take advantage of by leaning into implementation.
Best Practices for Digital Transformation in Private Equity
Before taking on any digital transformation initiatives, PE firms should have a clear transformation strategy outlining their objectives, priorities, and timelines while taking into account the unique characteristics of their portfolio companies and the industry landscape. While the digital transformation process doesn’t need to be complicated, it is critical that firms are strategic in how they carry out implementation. As a firm, the most valuable reason for transformation is the ability to convert acquisitions into data-driven smart companies.
Operating partners are playing an increasingly important role in this process as their close work with portfolio companies allows them to help identify opportunities, assess risk, and execute initiatives aligned with the digital transformation process. Getting them involved early in the process can allow firms to retain valuable input and buy-in while also helping to build necessary capabilities within the portfolio companies.
Within the due diligence process, firms must be able to identify areas where potential acquisitions can benefit most from digital transformation.
From a production side, firms have the ability to investigate supplier evaluations and see the production process, in real-time, to identify bottlenecks and opportunities to optimize workflow. Additionally, firms can evaluate inventory tracking and the potential to optimize working capital, track customer satisfaction to facilitate omnichannel sales and personalized marketing, and perform automated analysis for fund managers to judge the feasibility and profitability of new products and business models the target company aims to promote.
Both private equity and venture capital funds can leverage the technological innovations of digitalization to improve the efficiency of the due diligence process while also implementing them into their acquisitions as a means of value creation. As the number of PE firms continues to rise, the ability to understand these areas quickly is of growing importance to ensure firms aren’t losing out on acquisition opportunities to competitors.
Emerging Technology and Innovation
It is critical for private equity firms to leverage the correct digital and industry 4.0 technologies to maximize value creation within their portfolio of companies.
Digital investment is a key part of firms’ digital transformation strategies positioning them to disrupt traditional industries, improve efficiency, and enhance the value of their portfolio companies. The specific modalities and use cases for digital technology depend largely on the target company in question:
Artificial Intelligence & Machine Learning: These technologies are becoming increasingly important and can allow firms to better understand and analyze data, identify new investment opportunities, and improve operational efficiency within portfolio companies.
Big Data Analytics: With access to vast amounts of data, firms can acquire insights into market trends, customer behavior, and other key metrics to drive growth and innovation.
E-Commerce & Fintech: With the rise of online shopping and digital payments, these industries are experiencing significant growth and disruption, making them attractive targets for investment and tools for streamlining processes.
Blockchain: Firms are still beginning to explore this technology that offers the potential to revolutionize the way transactions are conducted, making them faster, more secure, and more transparent.
SaaS: This technology offers the ability to deliver software and other digital products over the internet, making it easier and more cost-effective for private equity firms to adopt new technologies and stay competitive.
Industry 4.0: Technologies like the Internet of Things (IoT), 5G, and edge computing are transforming how businesses operate. This provides private equity firms with an opportunity to improve efficiency, reduce cost, and enhance the customer experience within portfolio companies.
Digital transformation in private equity firms provides an exceptional opportunity to leverage technology and create value in portfolio companies. By strategically leveraging the innovations at their disposal, firms are able to improve target companies in a variety of ways:
Private equity firms can use digital technology to streamline their portfolio companies’ operations and improve efficiency. For example, by implementing automation and machine learning solutions, firms can automate repetitive tasks and improve decision-making based on data analysis. This can reduce costs, increase productivity, and even improve profitability.
Digital transformation can enable firms to leverage big data and AI to gain insights into customer preferences and behavior. By using this information, private equity firms can create offerings within their portfolio companies that are personalized to their customer base and improve customer engagement and overall customer experience.
Through digitalization, private equity firms can accelerate the growth of their portfolio companies by allowing them to quickly scale operations and enter new markets. Implementing cloud computing and SaaS solutions can assist companies in rapidly deploying new products and services, expanding their customer base.
These are just a few examples of how private equity firms can create value through digital transformation – internally and within their portfolio companies. Building a solid understanding of the opportunities that technological innovations have presented for private equity firms could be the difference between sinking or swimming in an increasingly competitive market.
2nd Watch partners with private equity firms to help them understand and execute their digital transformation strategy to ensure they are equipped to continue growing and separating themselves from the competition. With expertise in cloud migration and management services, we’re well-versed in the most effective ways PE firms can leverage digital transformation to create value. If you’re aware of the opportunity that digital transformation presents but feel like you could benefit from expert guidance, a whiteboard session with the 2nd Watch team is a great place to start. To learn more and begin the digital transformation process for your firm, contact us today and we can get started.