Insight Out (LPEA), September 2018
The Digitalization of Private Equity, a must, not an option
Digital is all around
Although many businesses have understood the urgency of embracing the digital transformation, the pace at which this has been undertaken varies from one industry to another. While a number of sectors tend to show some obvious signs of acceleration of their digitalization, others are still trying to find their way with these new disruptive technologies. The key issue for any actor within a specific sector is to transition towards a sustainable and meaningful digital state and to ultimately generate tangible benefits for the business.
What about Private Equity?
The digital transformation is one among numerous challenges the Private Equity world has to face. It however needs to be looked at from two different angles: i) the Private Equity firm and its funds and ii) the portfolio companies. On many occasions, Private Equity players have been pioneers in using digitalization as an enabler to improve the operational efficiency of their portfolio companies, create value and ultimately generate returns for their investors. In very concrete terms, digitalization has enabled them to reposition businesses in their respective markets and align them to the next customers’ expectations through advanced (and sometimes disruptive) technologies. Nowadays, the digital aspect is one of the key elements many Private Equity firms look at before entering into a deal. It has become an important part of the acquisition due diligences as it can be a major and quick driver of earnings increase.
Surprisingly, the digitalization of the Private Equity firms themselves and their funds has been less in focus. This delay is explained to some extent by the fact that there are other challenges that the industry has to deal with. The tax and regulatory reset initiated a few years ago with regulations such as the Alternative Investment Fund Managers Directive and the massive inflow of capital enjoyed by Private Equity firms are just a few examples. Other explanations include the lack of existing technologies relevant for Private Equity firms and their funds. While there is probably not a single technology which could convert the Private Equity business model into a fully digitalized one, there are plenty of opportunities for Private Equity players and their funds to introduce digital enablers in their day-to-day activities to gain efficiencies and manage scale. Robotic Process Automation (RPA), Data analytics or Blockchain technology can improve the efficiency of their current processes in many areas.
Data management is seen as a priority by Private Equity firms on their digital agenda and is a direct consequence of the increase in transparency requirements from regulators, investors and other stakeholders. Collecting data from portfolio companies to build various reporting has for too long been a manual excel-based process. The complexity of this reporting combined with the pressure experienced by finance functions in Private Equity firms to manage their costs is a major call for automated solutions to capture data and produce accurate reporting on a timely basis. In this context, a number of start-ups from the RegTech world are emerging with new solutions to collect, manage and use data in an intelligent way and support the entire valuation chain of Private Equity funds.
Advanced analytics also rank high on the digitalization agenda as insights gained from data can help identify targets, confirm assessments and predict trends. Specifically, Private Equity firms see value in being able to run scenario analyses and assess risks on their portfolios.
Data analytics used in transactions use target and third-party data, along with algorithms and other quantitative analysis to drive quicker decisions for mergers, acquisitions and divestitures. From a due diligence perspective, leveraging analytics can help to identify issues more quickly, focus the due diligence process and therefore help buyers and sellers to close a deal better and faster. Clearly advanced analytics can strengthen the ability of Private Equity firms to better anticipate evolutions of markets and companies and therefore improve the entire decision processes.
Robots Process Automation
Many firms still consider RPA to be in a wait-and-see mode and are just beginning to explore the capabilities and use test-cases to automate routine time-consuming tasks. Easy first instances to introduce RPA include Anti-Money Laundering/Know Your Customer documentation or investor reporting feeds. There are plenty of opportunities to use robots to free up employees for more value-added tasks and to better control costs. Finance functions will most probably be among the first users of this technology.
What about Blockchain?
At some point, the Blockchain technology will find its way into the value chain of Private Equity funds due to its proven and recognized ability to increase efficiency, transparency, security and the speed of transactions while drastically reducing the risk of error. In an environment where Private Equity firms continue to raise more capital in a broader investor base, including smaller size investors, this technology could play a major role and has the potential to replace a significant proportion of existing manual processes within fundraising and capital management. Others also see a potential in the asset safekeeping function.
Digital, the road to success
Private Equity is continuously in the spotlight with an increasing inflow of capital to manage. The new transparency requirements from many stakeholders and the need to benchmark and generate trend analysis at many levels of the value chain are a call for digital initiatives. In an environment where management fees are under pressure, these digital initiatives are much more than simply a desire to “catch up” to their peers in the broader financial services industry. They are more likely paramount to the building of the successful Private Equity firms of tomorrow.