Technology and software development opportunity in private equity portfolio companies
Technology and digital trends in the private equity (PE) industry in recent times
Increased value is often the basis for ensuring capital gains in private equity (PE). In the past, most private equity firms have created value in portfolio companies primarily by focusing on two types of leverage: first, reducing costs and improving operational efficiency, and second, increasing revenue through sales and marketing, product innovation, and geographical and vertical scaling.
Today, technology and software as well as digital transformation are among the ultimate value-creating tools that allow traditional, non-technical companies to gain a lot of value over an ownership period. Adopting leading-edge technologies such as Big data and analytics, artificial intelligence (AI), and the Machine Learning (ML) can help streamlining business process and generate added value. The Private Equity industry has recently become very open to take advantages of digital technology in the recent years.
PE firms are increasingly trying to evaluate and validate their investment thesis through the technology perspective. Through a number of initiatives, they invest in technologies and software development at the beginning of the deal lifecycle and allow the creating of value from data, a methodology used by some of the world's most valuable tech companies.
As time goes on nearing the exit stage, although the portfolio company is still in the "technology starters" phase, PE partners might still be looking to create a development strategy that can be implemented by the next buyers, before exiting the investment. To ensure that all of their portfolio companies benefit from technology investments, a significant number of PE firms have been creating the role of technology implementation partner.
The technology partners can assist to define and highlights the benefits of starting a digital business, work together with investment teams and portfolio company management firms, and gets the IT projects implementation started with the best IT professionals and business consulting partners within the industry
The potential for value creation through technology solutions of PE portfolio Companies
The road to digital transformation for a PE portfolio company often begins with digitization to improve performance, including new products development, shifting the transition to the industry-standard digital business model.
Companies in the PE portfolio differ significantly in terms of digital maturity and value creation potential. Based on assessments, the level of digital adoption is highly industry-dependent, while the adoption rates of well-known sectors such as technology, media, and finance are relatively high, and in contrast, manufacturing, health care, hospitality, construction, and agriculture could be lagging behind.
PE-backed companies that increasingly rely on software to increase their productivity and digital capabilities are not only investing in advanced technology but also own digital-physical assets that can generate greater value. Cloud computing technology, combined with the power of data analytics and AI, enhance innovation, helps companies gaining new insights available to increase efficiency, reduce costs, and generate additional revenue channels.
Ultimately, the benefits of investing in technology and software developments can translate into higher earnings, leading to overall value increased, at multiples folds.
For example, an innovative portfolio company can collect customer data, through the use of software application, that provides a 360-degree view of customers and takes appropriate actions to optimize their products and services.
Portfolio companies that are somewhat mature in terms of technology adoption, can typically take the next step by automating the process of administrative tasks such as data entry and reporting, as well as hiring new employees, using cloud platforms to increase workforce mobility and scalability, or implement Customer Relationship Management (CRM) and/or Enterprise Resource Planning (ERP) systems.
Low-adoption or traditional companies may typically lack these basic technical capabilities altogether.
How PE Firms can deploy technology solutions to boost the growth and performance of their portfolio companies?
According to a study by the Harvard Business Review the success of digital transformation can subsequently lead to a company’s revenue growth, and higher shareholder returns, through valuation and dividend impact.
In the context of PE, Successful digitization often depends on a digital strategy that should and could be scaled across the portfolio company, and adapted to investment teams and portfolio management teams.
Growth strategy - with an aim to generate new revenue channels - driven by digital technology, is based on companies’ understanding that they are the creators and sole owners of data sources and analytics capabilities, and models that are not publicly available or easy to replicate by others companies, and enhancing growth via digital channels, especially during the pandemic.
For instance, a PE-invested construction company adopts a wide range of real-time surveillance services that integrate the latest technology such as the Internet of Things and artificial intelligence into their camera surveillance systems to monitor equipment and site conditions, preventing accidents or thieves in advance.
On the other hand, data analytics, artificial intelligence, and automation can provide visibility for management teams to have a clear snapshot into the current business performance and optimize operational efficiency through intelligent workflows.
It can be seen that both business-to-business (B2B) and business-to-consumer (B2C) leverage the ability to collect the product and business data and enable automated, digital customer interactions to enhance customer experience and leads generation, along with pricing optimization and personalization of the customer experience.