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Winna Brown   

Hello, and welcome to the Positive Equity podcast, EY perspectives on the positive side of the private equity industry.  This series will explore the evolution of the private equity industry and what it means for the future.  I’m Winna Brown from EY and I’m your host. 

Hello and welcome.  In this episode we will discuss how digital transformation is impacting the private equity industry and how an effective digital strategy can create value for your business.  It’s my great pleasure to have Glenn Engler joining me today.  Glenn leads the digital practice globally for EY Parthenon at Ernst & Young LLP and leads digital strategy for EY Strategy and Transactions Group in the Americas.  Glenn, great to have you.

Glenn Engler

Thanks for having me join.

Brown

Digital means different things to different people.  Are you about to share with us what digital means to private equity?  What are some of the business models you’re seeing?

Engler

So, it’s such an interesting question because everybody understands digital, everybody says the word “digital,” and if you go around a room with a series of executives everybody has a slightly different interpretation.  To some it’s e-commerce, the mobile and social marketing piece, to others it’s technology, to others it’s data, to some it’s blockchain, RPA, and AI, and to others it’s all about disrupting the business model.  And I think what we’ve seen is it’s really important to start with a broader view of digital. 

So, when you think of sector-by-sector, whether it’s transportation, or hotel, or delivery services, or personal health and things like wearables, every single sector has gone through disruption through digital technology.  And the biggest takeaway that we see, I love to ask companies, whether it’s private equity on behalf of portfolio or a corporation, if you ask the question, “Hey, who owns digital strategy?” most of the time they’ll point to the Chief Marketing Officer or the Chief Technology Officer. 

I think our response will be, “You’ve now put digital in a technology or a marketing box as a result.”  I’d argue that if you look at some leading companies or brands that digital affects all aspects of the business from marketing, to sales, to customer care, to commerce, to supply chain, to talent, with remote talent, to corporate development.  It actually has to be owned by the Chief Executive Officer.               

When we think of what is digital, we’re trying to get companies to reframe the question from, “What’s your digital strategy?” which seems very narrowly focused on marketing or tech, to, “What’s your business strategy in a digital world?”  And as a result, you end up with it really needing to be owned by the CEO because it affects all aspects of the business.         

Brown

That’s really interesting and certainly puts a new twist on how digital is probably viewed by so many out there in our audience.  How are you finding that private equity is embracing this new way of looking at digital?    

Engler

It’s really interesting.  And I think if you were to put all of the private equity firms on the spectrum, whether it’s size of fund or sector, I think they would all admit, and having presented to operating teams and at conferences, I think they’ve all got their arms around digital in areas like …  And I’ll talk a little bit about the transaction life cycle.  But if they think of how do we go find organizations, companies that we’re interested in investing in?  Once we bring them in, how do we think about driving cost efficiency and how do we think about growth?  And there are sort of those areas.  So, let’s take those in a couple of different ways.                    

Most private equity firms at this point either have somebody who’s thinking about digital or have outside experts who are thinking about digital from both the investment standpoint and the operations.  I think they tend to start and focus on mission critical technology, infrastructure, IT data.  More and more are saying, “Hey, commerce is really important whether it’s B-to-B or B-to-C.” 

If we sort of take those two areas, let’s start with the concept of diligence.  We had an example, a really interesting company that was deemed mobile AI health.  A really interesting asset.  It’s got all the right words, right?  It’s got mobile, it’s got AI, it’s got health.  I heard this great line from someone that says, “If you want to get capital use AI.  If you want to get engineers use the word ‘machine learning.’”  Which is really kind of interesting. 

But the challenge for us as we help the firm think about diligence is multiple.  One, frequently there’s not a lot of revenue in a lot of these digital centric businesses and so how do I think about it from the quality of earnings and a finance standpoint?  There was a fundamental question from a commercial aspect which is how do I think about the market and how do I think about the particular organization? 

And so, this particular area was focused on obesity, pre-diabetes, and diabetes.  It required a doc to actually say, “Hey, you should use this.”  It required insurance from a payment standpoint, it required the patient to embrace it, the caregiver to use it.  And so, there’s this sort of classic interesting ecosystem.  And one of the things we had to determine from commercial is how big is the market, how interesting, what’s the patient likely usage, what’s the doc deployment?  How is the, for example, Diabetes Association going to endorse it?  Will it get funded. 

And then from a tech standpoint from a diligence, you needed to understand what is the underlying platform?  How scalable is it?  What’s the development standpoint?  Is it candidly really AI or is it just some really interesting rules with duct tape wrapped around it?  And so that’s sort one example of an asset that sits at this intersection of life sciences and health, of consumer and technology.  From a diligence standpoint for the private equity firms, more and more have to think about that sort of broader ecosystem on is this thing worth putting a lot of money into?  How do I think about it now and how do I think about it going forward?

Brown

So, when I think about that, diligence is a tried and true approach to “is this company worth investing in.”  Does this mean, if we’re thinking about digital not only in the back office and cost efficiency and value add at that end, we’re thinking commercial, but now we’re actually thinking about bringing two different companies in different sectors together in a way that’s never been thought of before.  Do you need skills that are different?  Is the traditional due diligence approach and mindset really going to work in this new world if you want to get a cutting edge and get ahead?

Engler

Yes.  So, I’d love to have this grandiose, this moment that everything will change super dramatically and unless you’re doing X it’s very binary, and of course, it’s really not true.  What I would say is, I think the private equity firms are realizing the complexity that it’s more, it’s not less.  And if you think about how does digital affect that?  Just the diligence standpoint, there are questions, I sort of listed a couple already.  There are questions around, how do I think of quality of earning and finance? 

So, when I do my traditional finance earnings, how do I think about it when there are not ten years of more measurable revenue to think about?  How do I think about the economics underneath that?  When I look at tech there are both back office and front office.  There’s a product development aspect.  There’s a question about IP, what is truly unique versus not?  There’s a question, clearly, from a talent standpoint.  You’re going to go purchase, acquire this organization.  There are three senior executives who are actually the fundamental DNA of the organization, and therefore, that talent side is the most important or is there something you can scale around the world?

And from a commercial standpoint, I think from an EY Parthenon standpoint when we get involved, really thinking about how do I understand what’s the attractiveness of the marketplace that’s out there, the value, the profitability, the competitive landscape?  And then what’s the secret sauce of this company to pull apart?  We’ve had to weave digital into all of those aspects.  And I think from a highly integrated EY standpoint when we bring all of those areas together, we’ve realized that digital has to weave through all of that. 

And for the private equity firm from their investment group, they similarly have to think about those whether they use outside firms to help or whether they do it themselves.  Maybe it’s as simple as it was many years ago and they’re trying to figure out what new skills they need to add internally versus how do they think about different outsource partners to help.

Brown

And so, the private equity firm that nails that and identifies the skills that they should be bringing to the table for this new world will probably be able to identify the better assets and help that company grow in a way that traditionally no one ever thought of using digital.

Engler

I think you’re seeing a lot of the private equity firms adding partners into either the operating team or a central area to help their deal partners and help their operating partners from a center of expertise around digital which also includes how do I get the right network of partners to potentially help both on the deal side and then once they come into the portfolio? 

The other thing that’s really interesting is if you think about the speed of a lot of the decision making.  One of the things, for example, we looked at all transactions in the US in life sciences and healthcare, I think, in calendar year 2017.  And we looked at what percentage were digital?  Sort of a plus or minus definition of it’s the core fundamental business, there’s a huge part of the value proposition that’s digital.  It was about 36-37 percent.  So, let’s say a third.  Of those about 80 percent were funded by venture capital.

And so one of the interesting challenges for private equity and for corporations is when you’re thinking about digital and when you’re thinking about all the different opportunities, frequently the companies are much smaller and sort of the traditional thresholds that you would look at to say, “Well, it needs to $150 million in revenue and X percent EBITA,” it kind of doesn’t work in a lot of the software and analytics area.  So, you see this really interesting mix when you use, to your point, about how do I think about, I’d go even more upstream to the origination and see what’s out there.  You actually have to look at what’s going on from a PE standpoint, a corporate standpoint, and a VC standpoint about where the money is flowing to see some of the patterns and themes. 

One example.  IOT, this wonderful phrase everybody uses affects absolutely every single sector whether it’s smart buildings and moving from simply selling heating ventilation air conditioning, to connected smart ecosystems, to telematics and automotive.  The whole concept of where is the value being created and how do I think about that?  There are software companies that are transforming big industrial industries and the need to bring those earlier.  If I’m a private equity firm that’s heavily focused in industrials and technology, now you take the IOT conversation that I’m talking about, by definition it’s going to stretch across the sectors.

And so, I think what a lot of private equity firms are both grappling with an embracing is how do we think more upstream on origination, where do we think value will ultimately be created, are we playing in the right sandboxes?  And then when it turns in and we want to make an investment, how do I make sure I have that more highly integrated diligence perspective with digital running through it?

Brown

So really the business model for private equity, we should be seeing a lot of change coming up.  There’ll be looking at smaller companies.  There’ll be mixing companies together and there’ll be potentially even thinking about exits differently down the track because of the way that businesses are coming together and creating different value than traditionally.

Engler

You said two things in there that I think are really important to hone in on.  One is how do you think about the origination and the diligence piece differently?  You see a lot of private equity firms either full time, part time folks that are coming that have different skills whether it’s, “Hey, I’m a commerce expert.  I’m now going to be a part of it,” or “I’m the digital technology person,” or “I’m going to be somebody that will really help from the value creation or the growth side.”  Earlier into the process is hugely important.  So that’s sort of part one that you said. 

Part two now turns the corner to, how do I help the portfolio companies once I have them in?  And so, let’s go there for a little bit.  I think the playbook of, let’s get a strategy plan together, let’s figure out the cost synergies and optimization and then we’ll go figure out growth, I think that is all blurring together into a big mosh pit of life for the private equity firms.  And so, you now have these experts helping on behalf of their portfolio companies.  And if you take a look at all of the companies in the portfolio, most private equity firms are sector based.  So, here’s the folks in, these are our technology and media folks, and here’s our industrial, and here’s life sciences. 

If you sort of go back to what I was teeing up around that mobile, AI, health aspect, I’d argue that you actually need your tech experts with your consumers experts, with your life sciences and healthcare experts working to help that particular company.  And so organizationally I think that’s a little bit trickier for private equity firms.

The other thing is that typically, in my experience, most private equity firms aren’t going to tell their portfolio companies what to do.  They’re going to help bring them in, maybe focus on some key, how do we look for efficiencies across the board, how do we align the organization for growth, and where are those growth drivers?  And they’re looking to help, again, connect the dots on behalf of that company when they come in.  And I think that tends to then segue into how when we work either with portfolio companies of private or direct with corporations, you tend to see a couple of different buckets of digital. 

One is there’s frequently this question of, “Hey, what’s the digital maturity of this …?  Like where are we?”  People tend to think about, all right, retail, consumer package goods, they’re completely there.  There’s a lot of media.  Probably the most amount of disruption that’s been going on, but I just listed life sciences, healthcare, auto, transportation, industrials, it’s sort of affecting everywhere. 

And there’s a question for portfolio companies as they go through not just the top five executives, but on the organization.  Like, “Do I have the right team set up for the future from a talent standpoint?”  So sometimes it’s as simple as, “I need some assessment of the team.”  And there’s a bunch of tools that can help, a bunch of different ways to say, “Hey, where are we?” 

And then we sort of see two big buckets of opportunities to help the portfolio companies.  One is absolutely on the more internally facing aspect.  That can be things like how do I think of digitizing the supply chain?  How do I think about using intelligent automation on areas that are more human based, on SG&A areas?  It can be things like how do I think about using the cloud as opposed to 37 different tech centers?  How do I think about centralized areas of analytics?  And if I’m doing app development instead of happening in a hundred different places is there way to combine it?  So, there’s an efficiency leverage positioning for scaled part which was, I guess, typically thought of the cost and efficiency standpoint, but there’s a digital lens there.

And then the second part is how do I drive growth?  Growth comes in so many different ways from digital.  It can be simple as, hey, how are we working with some of the big online marketplaces?  We are a consumer-packaged goods company.  Everybody’s trying to figure out how to go direct, but I’ve got the retail and the commerce platforms all over the world.  How do I think about that more efficiently?  How do I think about the fact that the in social media and search in these online market places there are a few big, really important companies that dominate … how do I engage with that?  How do I think about creating frictionless experiences with the customers B-to-B or B-to-C?  There is really a ripe set of opportunities on the efficiency side, if you will, and on the value creation or the revenue generating side. 

Brown

What comes to mind as you say all this, and certainly there’s a lot to be gained for the private equity firm that embraces this and gets ahead of the digital curve and brings it all together.  But if we shift gears a bit and we think about the company itself, you mentioned before digital used to sit with the IT, the CIO, and/or the marketing person and now really we’re saying that if you really want to embrace digital and get ahead of the curve the CEO needs to take charge of digital and have an enterprise view.  And a lot of the examples that you just brought to the table is really about the intersection.

Engler

Yes.

Brown

And the growth strategy.  How should you or what advice would you give to a CEO out there who is running a fast-growing company?  How do they stay ahead of the curve?  How do they think about digital?  And what’s the cost to them if they don’t think about digital?

Engler

It’s a great question.  I, maybe a month ago, presented to a private equity firm and I think it was 12 portfolio companies, CEOs, and CFOs.  So, there were, I don’t know, 35 people in the room or something.  And my goal kicking off at the beginning of the day was at the end of 40 minutes I knew it worked because I had people coming up to me, CEOs, and going, “You just pounded into me that I actually have to own digital.”  To me, that’s the most important thing.

If you start out, and I always love to ask questions, “Hey, who owns digital?”  And they will almost to a T basically point to somebody, its Chief Digital Officer, its Chief Marketing Office, its NIT, its somewhere else.  By the end of the conversation if I’ve convinced you that digital affects the supply chain, it affects commerce, it affects customer care, it affects marketing, it affects sales, it affects talent, it affects your corporate development inorganic growth strategy, it has to sit at the CEO.  And that’s actually pretty daunting and that’s a little bit scary.

And so, once you’ve got them going, “Oh, wow, I now I have to own it,” then there’s a question of, all right, by definition this is integrative, how do I think about it?  And that’s where we’re trying to unpack it and make it a little bit simpler to think about, look, you’ve got your IT organization.  Everything I just talked through about leveraging the cloud, about centralized engineering group, about digitizing the supply chain, about using intelligent automation to streamline and make more efficiency, there are people that should own and run that, but you should think about that because that can free up a huge amount of cost, and therefore, potential capital to deploy.

On the interesting part on the growth aspect of digital, in some respects I actually think it’s easier for CEOs to wrap their heads around that first one which is take out cost efficiency.  “Okay, cool, I got it.  It’s IT, it’s finance, let’s go do that.”  I think depending on the sector, I’ve been spending a lot of time, as you can probably tell, in industrials.  Medical device is really interesting.  These are industries that are going through so much change from what used to be.  It was a very classic both supply chain and value chain.  I’m an OEM, I create something.  I’ve got a distribution.  I have a salesforce.  I may own the salesforce, I may have some partnerships that are there.

Well, there are a bunch of challenges.  One, let’s take a piece of equipment.  I now have IOT, they are connected, and I actually know my goal is to minimize downtime.  I can tell, predict, or prevent a maintenance to say when this thing is likely to need fixing and replace it.  All of a sudden, I run the risk of disintermediating that entire channel, many of which we may own or have a large stake into.  And that’s where the people and the incentives get in the way.

The other interesting complicating factors in industrials, for example, is most executives spent time in sales.  So, they grew up in a system that made them very successful of, well, of course, we have our sales force that goes after our best customers and biggest customers of theirs.  And these we use in a classic sort of pyramid approach.  Now I actually know when these machines, as they’re sending data, when they’re likely to have downtime, when they need fixing.  I have a completely different relationship with the channel.

And the reason there’s so much disruption going on in industries like that is the big companies get paralyzed because of their org structure and incentives.  And when you start talking that way the CEO realizes that’s the only person, she or he are the only ones that actually will change it.  How do I keep my salesforce whole?  Based on I gave them those incentives, we’re all driven by incentives whether we like it or not.  How do I think about partnerships?  Do I think about selling direct?  Which can be a third rail for certain organizations.  But that’s why the customer view is so important. 

There are certain companies that are out there that, I’d argue, have ruined things like customer experience for everybody else.  Because what are we trained?  We want fast, one click recommendations, remember me, and give me reviews.  And I really don’t care what you’re selling, the whole B-to-B, B-to-C is blurring.  And so, I think the reason the CEO has to own this is these are really hard organizational changes for multi-billion dollar organizations and you have to think that way based upon the customer and based upon what’s available, and candidly based upon opening the aperture to see all of the disruptive players. 

That’s why we always like to look at where the venture capital money is going because those are wonderful cues about where potential value can be created.  And candidly, you as a big company, where there’s potential value destruction if you’re not thinking fundamentally differently.

Brown

Do you think, therefore, I mean, the CEO is obviously key, do you think that the traditional skills that a CEO has always had are the skills that will hold them steady into the future or are we going to be looking at a different type of CEO to be able to harness digital?

Engler

If you take what’s going on in the Chief Marketing Officer role as a bit of a cue, like overtime the Chief Marketing Officer role has evolved from, “I’m the brand owner,” heavy mass marketing TV and print, and then there’s that digital thing to the point that in many organizations the CMO has a bigger IT budget, if you will, than the CIO. 

Data is obviously critical.  All aspects of mobile, devices, it’s no longer two or three channels and platforms to think about.  There are hundreds and what do I do?  Do I care about all of the different social media platforms and how do I think about it?  And the answer is you have to care about social media given the world of customer service whether you are a supplier or a distributor or you’re selling cosmetics.  Obviously, some sectors are a little more robust, but all are critically important.

I think what we’re seeing is there are CEOs who have grown up in their sector.  The ones who are intellectually curious, willing to say, “There’s something going on out there, I need to understand it,” and curious enough to take the leadership team to understand sense and sort of push the traditional boundaries …  You still need to be really good at running a company, running the finance, and understanding through public how do I deal with the capital markets, you know, everybody has the bosses and chair holders to deal with.  So, all of those skills, clearly, still matter. 

I think it’s really important for CEOs to not be afraid of data and to understand that this digital thing is not just for consumer brands and it’s not just for 16 to 25 year olds.  It affects every single business.  And so, do they have to be experts in all the platforms?  Of course not.  Do they need to be afraid or comfortable?  I’d argue that if you’re afraid of those platforms, if you haven’t gone onto the social media … Actually, there’s a lot of really interesting reverse mentoring going on.  They have employees in their organizations that live and breathe this. 

The more that the CEO shows their comfort, curiosity, and understanding from the customer standpoint and understanding the disruption factors that are going, they’re just going to be better served to drive the future health of the organization.

Brown

That sounds right.  The world is changing so rapidly and digital is accelerating the change.  So, I guess one of my questions is, technology is moving at a faster pace than it’s ever had, and it continues to accelerate, and there are so many amazing things that are happening to transform companies and sectors, where are we on the spectrum in this journey?  Are we just beginning?  Are we only starting to see a disruption?   What’s the future holding?

Engler

I think the answer is it’s here.  It’s disrupting every sector for sure, some much more so.  And even some like publishing that have been disrupted with the ad model ten years ago are continuing to go through, how do I think about a pay wall, or free content, and where should be?  And how do I think about the importance of search?  And are there partnerships?  And gee, we got through the Instagram influencers and all of the social media influencer standpoint that has now changed a little bit, and how do I think about that as part of the portfolio?  I think it varies by level of maturity by sector. 

I think there are certain sectors, life sciences, the industrials, transportation, continuing to probably go through the most amount of disruption.  Chemicals, oil, and gas, different areas, there are different levels of maturity.  The answer is it’s here for everybody at different levels and it will continue.  I do think one of the dangers that we see is people fall in love with a shiny object of the technology.  And the biggest mistake that we’d see when we were helping organizations thinking through their business strategy in a digital world is it has to be business led, it has to be customer led, it can’t be technology led. 

Most companies have hundreds of digital initiatives that are all popping around in various levels, and that’s great.  But because someone internally came up with this idea that they think is really neat because it’s based on an RPA, or a blockchain, or AI, or something, if it doesn’t ultimately serve a purpose, if it can’t be scalable, if it can’t drive some customer behavior, is this about increasing the relationship with your best customers?  This is about getting access to new customers.  Is this about driving partnerships?  Is this about your downstream revenue opportunity?  Is this about driving changes with your suppliers? 

You know, 3-D printing, really cool, how do I think about it?  In industrial categories it can consolidate three or four steps in the supply change, and it has an ability of changing that.  It has the ability of changing access to new customers, but it doesn’t mean we should do 3-D printing for the sake of 3-D printing.  And I think the same thing with, “Hey, this blockchain thing sounds cool.  Let’s go do stuff,” or RPA. 

The caution is there’s constantly new stuff all over the place and you can get completely enamored with shiny objects.  And it’s really important, again back to the CEO, how do we prioritize?  We need to place bets.  We always say when you think about business strategy in a digital world, you as a CEO, you need to place multiple bets.  You need to be better probably at identifying what’s working and scaling them faster, but also killing things. 

And within a corporation private equity and venture capital are really good at this.  More often than not corporations tend to fall in love.  “Hey, my buddy Jim wants to run this.  I’m going to fund it.”  And they’re going and it’s like not getting traction.  How do I have the discipline and the rigor to say, “We’ve placed too many bets, we’ve got pilots going, we’re going to stop that.  We’re going to dial this one up”? 

And I think that’s the important mindset.  That there is no silver bullet, and this is not about chasing shiny technology and it’s why we keep coming back to think about what you can do from an organizational standpoint about truly making sure you have the right talent.  Think of what you can do from a cost and efficiency standpoint and think what you can do from the revenue and the growth of your current business models, or candidly, net-new business models that may be out there.  And I’d argue that those things that I just talked about, it’s kind of what a CEO is trained for.  You just have to open your aperture around this new sandbox.

Brown

That’s actually really advice because I think everyone is talking about digital transformation and I think so many people don’t really know what it means and they are chasing that new toy, so to speak.  And the fundamentals of running a business and focusing on your customer have not gone away.  And that’s really a good takeaway here. 

What we’re talking about is accessing new customers, accessing customers in a different way, and getting some cost efficiencies in the back office, but really the fundamentals of you have to serve your customer and make sure what you’re bringing to them is what they want and need so that your market share can grow.  Let’s use digital to help achieve that, but don’t let digital get in the way of the mission which is your customer.

Engler

Completely true.  Look, it has impact in terms of the organization and the talent.  And I think we see a lot of companies making acquisitions to acqui-hire talent.  That’s great.  That’s works in certain categories.  You may also say, “Hey, there’s this really cool company.  We’re going to go buy them.”  And we’re this really multi-hundred year company sitting in an area that maybe is not where this certain talent wants to be and so people have said, “How do I go do something in Silicon Valley?” or “How do I do something in other areas?” 

So, I think there’s a talent aspect of you’ve got to have data scientists, you’ve got to have engineers.  You’ve got to have those chops internally.  But I think the way you summarized it is spot on.  In some respects, it is the next evolution of the playbook, but it’s really important to open the aperture and sort of think a little bit differently without chasing shiny objects.

Brown

Yes.  Well, thanks, Glenn, that’s fantastic and some great insights for everyone in the audience today.  And we really appreciate having you with us here.  And clearly, private equity firms and companies really need to be thinking about digital transformation or they will get left behind, but at the same, to your point, they need to keep focused on growing the business and the customer and doing that in the right way.  And those who stay ahead of digital transformation will probably grow faster and be even more successful sooner.  So good advice. 

Thank you again.  Definitely exciting times ahead.  We’ll keep watching the fast-growing digital evolution.  Thanks, Glenn.  And thank you as well to all our listeners.  I hope you’ve enjoyed this episode and if you have, please remember to subscribe to the series or leave a rating or review.  And of course, share it with your colleagues and friends. If you’d like to find out about topics discussed and related links, they’re going to be posted on EY.com/private equity.  I look forward to speaking with you in the next episode of the Positive Equity Podcast.  EY perspectives on the positive side of the private equity industry. 

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Brown

Glenn, we’ve spent a lot of time talking about how portfolio companies and operating partners of private equity firms can think about digital transformation, but what about the PE complex itself?  Is there a way that they should be thinking about digital transformation in their business?

Engler

It’s a really interesting question.  And I think you’re starting to see different models surface.  I mentioned earlier the idea of bringing in more “digital chops” to help on both the upstream diligence origination piece and on behalf of the operating companies.  And I think that’s a first part that’s the bigger private equity firms that have larger portfolios, by definition, they need more folks.  They almost all have the tech side.  And I think more and more are adding in the revenue generating piece.  And so, I think from a talent standpoint that’s important.

The other type of areas that become more and more important are around data and the concept.  There’s more and more data than ever before not only from data aggregation and use standpoint, there are tools out there to help with the scanning, there’s more data that’s flowing back and forth.  How do I think about the data room and all the other aspects that come up?  But also, from the data privacy and security standpoint.

So, one of the things that’s really interesting, the whole GDPR impact in Europe and its impact all around the world.  One of the things we’re seeing is, A, the importance of data more than ever before, of really understanding it.  B, making sure it’s secure.  Every other day there are issues with breach, or leak, or something, and more and more that responsibility is, clearly, going to be at the PE fund level, the complex level.

I think the other aspect is when you think about why do I need more data chops within the private equity complex, you start thinking about value.  If you take GDPR to its logical conclusion as we’re seeing with organizations, first party data becomes more important than ever before.  And your point earlier about pendulums swinging, I’d argue in some respects, interestingly enough from the marketing world, the old CRM world is more important than it ever was, like back to where it was.

And so, if I’m a private equity complex on behalf of the portfolio companies I’ve got to understand data.  I’ve got to understand the power of data, outside data, inside data, and I’ve got to understand the security around it.  And I think most firms are quickly realizing that the one or two tech folks probably are not sufficient based on this new world.  And so, I think you see it from a talent standpoint, I think you see it from an architecture standpoint, I think you see it from a partnership standpoint.  And I think most private equity firms would have folks at “the center” as streamlined and small as possible, yet it’s pretty clear that there are certain investments and certain types of talent that are needed to help both growth and protect, if you will.

Brown

So those firms that actually start bringing those people onboard, and embracing digital transformation and gathering that data will be better equipped to run their businesses going forward and to be ahead of the game when it comes to finding those right portfolio companies to invest in.  Is that right?

Engler

Yes, I think that’s right.  And if you look at how do I add value on behalf of the portfolio company, the advantage that PE complex has is the ability to see across their portfolio. 

And so, what used to be, “Let’s go have a session and bring in some experts.  Okay, that’s cool, we had a good meeting,” I’d argue it’s more, lean forward all the time being involved to add value and that requires, arguably, different people, different tools, different ways of adding value to the portfolio companies than maybe they’ve done before.  And I think you’re seeing it again across the private equity firms starting to approach it fundamentally differently.  How do we think about it?  Because our goal is we want to get the right companies, we want to make them thrive, we want to have a good, healthy exit and I think that almost responsibly sits at the fund level.  And that’s tools, that’s risk, mitigation, and that’s a network of partners to help.

Brown

So, as you said, digital is here.  It’s not going away and those private equity complexes that embrace digital at the fund level, at the operations level, in their diligence.  And indeed, those portfolio companies and the CEOs who run them who embrace digital are the ones who are really going to have a higher level of value creation and a higher level of growth, and effectively be more successful.

Engler

Absolutely.  We agree with that statement.

Brown

(Laughs) Fantastic.  Well, look, Glenn, thank you so much for being with us here today.  It’s been a fantastic conversation.  Very interesting.  And really appreciate you sharing your digital insights with us.  And clearly, private equity firms that master embedding the digital transformation throughout their PE life cycle are going to be more successful.  So, we look forward to seeing that journey in the coming years ahead.

Engler

Thanks for having me.

Brown

A pleasure.  To our listeners, thank you for listening.  If you’ve enjoyed this episode, please remember to subscribe to the series or leave a rating or review.  And of course, share it with your colleagues and friends.  If you’d like to find out about topics discussed and related links, they’re going to be posted on EY.com/private equity.  I look forward to speaking with you over the next episode on the Positive Equity Podcast, EY perspectives on the positive side of the private equity industry.

Disclaimer: The views of third parties set out in this publication are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.

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