Private equity sees disruption through emerging technologies

New York, 30 January 2018

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  • Private equity firms have more opportunity for partnerships
  • Competition drives the evolution of operating resources

As the private equity (PE) market continues to evolve 10 years after its 2007 peak, firms are seeing that the implementation of digital technologies have a dramatic impact on the ways that PE firms organize and execute at the firm level, according to the EY Global PE Watch 2018 report. These technologies include robotic process automation (RPA), artificial intelligence (AI) and the Internet of Things (IoT) and are having an intense effect driving value across firm’s portfolios.

Herb Engert, EY Global Private Equity Leader, says:

“While there are some similarities today to 2007, PE as a sector has undergone a significant transformation. Not only have the industry’s assets under management grown more than 80% over the last decade, but the way it drives value has evolved as well, with PE firms employing a wide range of models and resources to drive operational value creation.”

Helping their investees drive operational value creation and execute a holistic digital approach to their entire business is increasingly one of the most significant value drivers for PE firms of all types, regardless of their sector specialization, geography, strategy or size.

Ten years ago, the number of potential deal partners was far smaller than it is today; however, as limited partners (LPs) look to deploy more assets in private investments in cost-effective ways, interest and involvement of many institutional investors in co-investment and direct investment is increasing, giving PE firms more choices than before. During this time period, for example, club deals involving two or more PE sponsors accounted for 66% of all PE megadeals (deals of US$5b and larger). Today, about 33% of such deals are club deals; far more common are deals involving family offices, corporates and pension funds. Partnering with these entities provides a growing opportunity for PE firms to add value in today’s evolving market.

According to the report, when looking for new ways to partner, PE firms should look first to customers, including pension funds and family offices with specific industry expertise, speed to execute deals and the ability to add value to a deal in ways that other financial sponsor can’t. Firms should also look to partner with competitors as strategic investors. The investors can provide firms with the ability to leverage synergies and the ability to achieve larger deal sizes without forming a PE consortium where alignments may be more difficult.

Engert says: “A decade ago, operating resources were concentrated at larger firms. In the past few years, small and mid-market firms have been increasingly catching up. As firms look to more systematically and comprehensively create operational value, they should look at working with senior industry executives on a full-time or part-time basis and hiring outside functional experts with deep expertise across a range of competencies.”

The complete report is available here.

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