Sponsors and CFOs embrace Private Techquity  


Amy Newlan

Like your 80-year-old great aunt’s refusal to use a smartphone, private equity has stubbornly resisted technology adoption and digital modernization. Your aunt has a generational excuse. Private equity does not.

But behind the ubiquity of excel spreadsheets, we are starting to see a shift toward digitization and modernization. This shift underscores private equity’s slow (but still very real) evolution into Private Techquity. If the former is an industry that shies away from operational adoption of technology, the latter is a sector that embraces it (or at least accepts it) as the beating heart of efficiency.

But where exactly is this evolution occurring? How do sponsors and PE-backed CFOs view the role of technology within the industry and where, specifically, do they seek additional technology enhancements?

We may finally have (some) answers: Accordion undertook a survey of both PE sponsors and portfolio company CFOs to understand how these shifting industry headwinds have impacted the dynamic between PE firms and company management, specifically with the CFO, who sits at the nexus of that relationship.

The survey was intended to find the good, the bad and the confusing aspects of the firm-finance dynamic. And while it certainly did that, it also revealed a sub-plot woven throughout sponsor and CFO responses: the elevation of technology as a critical component to deal success. This surprising sub-plot includes four takeaways:

PE GETS ‘WOKE’ TO TECH:

Sponsors and CFOs share the perspective that tech enablement must be the key area of focus for the finance department. Indeed, both ranked tech enablement atop their list of the key areas where finance should spend its time and resources across the next year. (Ranking it a higher priority than traditional areas of cost reduction, working capital, M&A, etc.)

On the CFO side, the days of the controller-style department are long gone. Whether in the form of enterprise resource planning, customer relationship management, or business intelligence, technology is helping the finance function collect, analyze and contextualize data. This synthesized data can be used with predictive analytics to enhance forward-looking business decisions.

On the sponsor side, a new wave of tech-centric PE firms has enlightened the industry to the benefits of technology. As a result, many firms have actively recruited technologists and tech veterans to serve as operating partners. These executives, in turn, have fully embraced the role technology can play to help finance teams mine the data at their disposal.

ADDING VALUE TO VALUE CREATION: 

Eighty-six percent of CFOs and 88% of sponsors believe having a digital value creation plan would make the relationship between sponsors and CFOs more successful and productive.

That CFOs value a digital plan, which would enhance alignment with sponsor priorities, is interesting, but not surprising. That sponsors would overwhelmingly agree is both surprising and telling: It suggests that the PE market is eager to professionalize and operationalize value creation. It also suggests that no matter what they are telling their LPs, sponsor institutionalization of value creation is not yet a reality. At least not yet; not without the available software tools to facilitate portfolio-wide implementation.

RELIEVING REPORTING BURDENS: 

The firm-CFO relationship is a delicate one, made more difficult by the fact that most CFOs feel that the reporting demands of their sponsors are unreasonable and place an unnecessary burden on the finance team.

CFOs are looking for a solution in the form of digital assistance. Eighty-four percent of CFOs believe enhanced technologies that ease requests for financial reports would help improve the relationship with their private equity team.

Although sponsors do not feel their requests are overly burdensome, 91% still share the CFO view that technology to further minimize the reporting disruptions would be helpful to the CFO-PE firm dynamic.

TECH FOR THE WIN: 

On the bigger question of the broader CFO-PE firm dynamic, the survey found that an overwhelming majority of CFOs believe that increasing PE firms’ operational involvement would promote a more successful working relationship.

That collaboration, they believe, can—and should be—supported by better use of technology. Eight-nine percent of CFOs believe that tech-enabled communication tools would promote a more productive relationship between PE teams and the finance department, a view that sponsors overwhelmingly share (90%).

So the industry that was—like your great aunt—the most reluctant to embrace technology is finally seeing it as a valuable, productive enabler. But will PE partners finally invest in the systems and next-gen tools needed to modernize private equity? The need for those tools is an unquestioned reality. And early adopters and innovative PE firms see that and are already (!) investing. Whether the broader industry will pay for those tools (or get left behind)—well, that’s the (multi) million-dollar question….

By Amy Newlan, SVP, Head of Client Development for Maestro at Accordion