8 minute read 2 Oct 2020
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How private equity can define a business strategy for a digital world

By Richard Bulkley

EY-Parthenon Partner, Transaction Strategy and Execution, Ernst & Young LLP

Leading digital value creation. Helping companies and people realize their full potential as a result of adopting the right technology solutions.

8 minute read 2 Oct 2020

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  • PE Pulse Quarterly insights and intelligence on PE trends Q3 2020 (pdf)

The digital agenda has moved from the periphery to become a core focus across the private equity ecosystem.

In brief
  • Incorporating a digital lens into diligence is a core requirement that allows deal teams to fully evaluate potential assets.
  • Digital is a value creation lever and is integral throughout the deal lifecycle.

“Digital” today is about driving enhanced experiences for customers and stakeholders, whether it’s an end consumer, business customer, employee, business partner or investor. It is about modernizing business and incorporating new ways of thinking in addition to understanding the technologies that underlie these enhanced customer experiences.

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Digital technologies and strategies lend significant advantages to an organization’s supply chain, commerce, tax, talent and corporate functions, yet private equity (PE) 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.

Consumers of all generations and geographies have come to expect fast, intuitive digital experiences, not only from e-commerce retailers, but from insurance companies, healthcare providers and financial services. As a result, an exceptional customer experience is now a mandate for every organization, regardless of its technological capabilities, industry, or target customer base.

We have gone through five years of digital transformation in five months.

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.

Today, an organization’s digital agenda should be owned by the CEO. The pandemic has exposed organizations that lack strong digital capabilities, relegating them to the sidelines as their savvier competitors’ foresight delivers measurable business benefits and attractive returns for investors.

This article examines three areas where digital can help PE drive transformative growth:

  1. Upstream: helping GPs originate deals, identify targets ripe for growth and digital adoption, and carry out due diligence pre-investment.
  2. Midstream: helping PE funds be better connected to their portfolio companies and operate more effectively.
  3. Downstream: helping both general partners (GPs) and portfolio company C-suites create value.
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Chapter 1

Creating value in the portfolio

Unlocking value through digital must be a top priority for portfolio company CEOs.

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, for example:

  • 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.
  • GP’s and CEOs are also showing interest in RPA and intelligent automation to drive efficiency improvements in the back office. Automation can streamline labour 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. For example, with acute pressure on hospitals during the pandemic, uptake of telehealth services sharply increased. Here, a secure data environment is paramount to ensure medical records remain private and customers remain confident in a service they may be trying for the first time.

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Chapter 2

Improving digital readiness

The better PE firms understand a company’s digital readiness, the greater their ability to understand their competitive positioning.

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.

For tech-based organizations that may not have any traditional profit or revenue and forecast estimates, digital readiness is usually not an issue. In such instances, diligence can uncover the underlying structure, product development and R&D roadmap of a company, as well as answer questions around talent — particularly important if investors view an organization as a talent-based opportunity. This can also generate questions around intellectual property and patents.

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.

In addition, a more robust digital readiness assessment (DRA) post-investment empowers portfolio company executives to benchmark a company’s maturity in areas such as supply chain, marketing, talent and risk. This broad survey-based assessment benchmarks seven focus areas against a peer group, provides comparative insights from across the portfolio and identifies priority areas of focus. Such an analysis can build organizational alignment around digital and identify the appropriate talent mix that can execute the digital strategy.

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Chapter 3

Putting digital strategy at the core of the fund

PE firms can benefit from dedicated digital leaders to drive the transformation agenda.

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 digitalised 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.

The informal conversations are irreplaceable. This is what PE is missing. You have to schedule the informal to sustain relationships.
Andres Saenz
EY Global Vice Chair ꟷ Strategy

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 into every asset and deal lifecycle — as well as into their own businesses.

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A strong digital agenda can drive long-term value creation and boost efficiency within the PE complex.

About this article

By Richard Bulkley

EY-Parthenon Partner, Transaction Strategy and Execution, Ernst & Young LLP

Leading digital value creation. Helping companies and people realize their full potential as a result of adopting the right technology solutions.