By Glenn Engler and Richard Bulkley
Digital technologies and strategies lend significant advantages to an organization’s supply chain, commerce, tax, talent and corporate functions, yet private equity firms still grapple with what “digital” even means. For some, it’s about using intelligent automation and robotic process automation (RPA) to streamline and drive efficiency, while for others it’s strengthening cybersecurity, driving marketing and sales activities or improving end customer experiences.
Although some changes are more likely to stick than others, this current period of profound upheaval means that businesses are under pressure to make digital a top priority. Activating that transformation – while already important before the pandemic – has now become a core component of the value creation agenda. The time has come for PE to embed a digital strategy throughout the deal cycle – from origination and due diligence, right through value creation and exit – as well as within the infrastructure of the firm itself.
Creating value in the portfolio
An effective, scalable transformative agenda must align across the entire portfolio, encompass both traditional and digital levers and needs an integrated execution plan. From product and operating model digitalization, to software as a service (SaaS) and cybersecurity, a range of solutions can drive innovation and improve customer experience.
GPs and portfolio company CEOs are primarily focused on value creation, in several areas.
One of the fastest growing trends is creating “digital twins,” a scenario planning exercise in which an organization maps out its supply chain in a digital environment. This exercise enables investors to quickly analyze inefficiencies and their impact downstream.
GPs and CEOs are also showing interest in RPA and intelligent automation to drive efficiency improvements in the back office. Automation can streamline labor intensive activities within departments such as tax, finance, HR and others that are resource heavy. Machine learning and RPA can drive faster, cheaper, more efficient and higher quality results – and are unsurprisingly attractive to GPs who want to see ROI quickly.
With increased digitization comes increased exposure to risk, and Cybersecurity has become a prominent concern, especially with the shift to remote working environments. With businesses operating from employees’ homes, the risks of these environments need to be considered.
Improving digital readiness
GPs should be using smarter technologies to boost the breadth of their understanding around a company’s digital maturity and readiness. This can occur upstream in origination and due diligence, in which an asset’s strengths and weaknesses are evaluated through a digital “lens.” PE firms have increasingly come to appreciate that the right technologies can provide more ways to probe the quality of a potential acquisition whose competitive positioning is increasingly influenced both directly and peripherally by the digital landscape.
Predictive analytics can help PE firms to use data more effectively, removing some of the human inconsistences of a manual methodology. By using machine learning to create a scoring algorithm for potential deals, GPs can more accurately quantify the technological maturity of each opportunity and reduce some of the manual effort associated with managing “shadow portfolios” of potentially transactable assets.
Putting digital strategy at the core of the fund
With pricing multiples at historically high levels, the PE value creation agenda has become a more important driver of EBITDA and overall deal exit returns. Digital is increasingly seen as a value creation lever that must be integrated throughout the deal lifecycle. Key steps to achieving this include:
Considering both the tactical and strategic benefits of transformation; understanding the tax implications (e.g. R&D credits); understanding the valuation benefits of an asset becoming more digitalized and therefore easier to scale; closing the gaps that are identified during a readiness assessment.
Because of its importance, the biggest PE firms now have dedicated leaders whose sole remit is to drive their firm’s digital agenda by leveraging their own rich expertise or, if needed, the additional expertise of an external partner. Their role has become even more important – and is likely to stay central to future strategy development and execution.
Funds should not overlook their own ways of working. Like many others, PE firms have shifted to video conferencing, and in an industry that traditionally values face-to-face contact, this has been a significant adjustment. While video conferencing has been embraced, for some a continued challenge is “scheduling the informal”: after all, sometimes what is said over coffee is as important as what was said in the boardroom.
So, is private equity going back to “business as usual” or is there a better way?
It is now abundantly clear that the organizations most caught off-guard by the pandemic are the ones that had not made digital a priority. Moving forward, PE firms must learn from their mistakes and embed digital in every asset and deal lifecycle – as well as in their own businesses.
Glenn Engler is EY-Parthenon Global Digital Leader; EY Americas Strategy and Transactions Digital Leader. Richard Bulkley is UK&I Digital Value Creation Leader, Ernst & Young LLP