How Digital Transformation Can Benefit Private Equity Firms
The technology advancement in recent years has significantly impacted and disrupted business models across industries, changing the way every company operates. The private equity sector has not been immune to this trend, with firms quickly invest in and implement new technology systems across their business in order to improve investment strategies.
Like other businesses, private equity firms can now have access to the vast amount of data that can offer meaningful insights, supporting their investment decisions. This development has opened up new ways to streamline the investment evaluation process, at the same time gaining an advantage in an increasingly competitive market.
The future market leaders will be those who can quickly capitalize on leading-edge technologies and data, making a difference, while at the same time, generating good returns on investment.
Here, we review the ways that private equity firms can take advantage of digital transformation to keep up with the marketing forward into the upcoming years.
In the past, private equity firms usually made investment decisions based on traditional, cyclical data sources, such as quarterly earnings, financial reports, tax filing, research papers, etc. This type of data could be limited in terms of scope and frequency.
The new types of alternative data, including unstructured data, can be leveraged, along with artificial intelligence/machine learning techniques such as NLP to transform the status quo and assist PE firms to make assessments in real-time (or near real-time), rather than periodically.
This is to deduce that the private equity picture is becoming more heated than ever. Money is available for investments, but being able to obtain a new investment “factor” that can help improve the way firms select the potential target to invest in can be the real game-changer here.
To keep up with the trend, private equity firms are going to have to consider and adopt digital transformation, for both internal operation process and management of investment portfolio.
Some PE firms were slow to the adoption of digital innovation, but soon digital transformation will no longer remain an option, but rather an essential for the future of the firm.
Whether to kick-start digital transformation by utilizing in-house resources or partner with a software development company that can help you taking care of the technical development part, it’s important to take action now.
Taking the in-house route, private equity firms will have to compete with other organizations in different industries, using disruptive technologies, to hire the right IT talent. Furthermore, the business teams and technical teams will need to be integrated to create have synchronization on the models and processes.
The Importance of Data & Advanced Analytics
Digitization of business processes does not equal the complete elimination of human judgment, especially in the investment business. PE firms still need to rely on humans as well as some traditional methodologies to find and evaluate the potential investment targets of their portfolios, like company earnings, industry reports, cash flows, and expenses, etc.
Yet, big data and advanced analytics increasingly play an important role in the process, providing useful insights to help PE firms becoming more informed, with meaningful analysis, and investment opportunities can ultimately be assessed more accurately. Private equity firms that opt for the digital route could gain various advantages such as:
- Identify potential investment targets quicker and more efficiently.
- Evaluate their value based on insights generated from various traditional data and alternative data sources.
- Define the factors for making an optimal pricing offer.
For example, an investment firm was looking to invest in several investment targets companies and decided to implement a technology solution to make the evaluation process more effective.
By leveraging our strong experience in software development and cutting edge Data & Analytics capabilities as well as Machine Learning Technologies, we have successfully helped firms to create a solution from scratch - capable of collecting data from many online public sources (e.g. websites, social media, and more through web-crawl). Combined with internal data and proprietary investment strategy, the solution enables firms to better evaluate how those investment targets would perform and, support the ultimate investment decision-making.
In particular, the solutions take into account data regarding the overall sentiment from a plethora of reviews websites, as well as social media and other publicly available data sources. These actionable insights allow our clients to better gauge the health and prospect of a potential investment target, beyond mere financial performance.
The Impact of Digital Transformation on The Private Equity Sector
All in all, the investment business and private equity industry are undergoing a significant transformation where the increasing use of technology to glean meaningful insights from data can make a real difference between leaders and laggers.
Transformation doesn’t happen overnight. However, by gradually adapting to change, for example by developing an integrated system within the cloud computing landscape that enable a wide selection of tools and features - such as advanced analytics and reporting - PE firms could see the benefits through the optimization, speed-up of their investment process, which is an important catalyst to win the competition.