Paperjam, November 2018
The Private Equity of tomorrow: can it be digital?
The digital transformation is one among numerous challenges the Private Equity (PE) world has to face.
Occasionally, PE players have been pioneers in using digitalization as an enabler to improve the operational efficiency of their portfolio companies, create value and generate returns for their investors. It has become an important part of the acquisition due diligences as a major driver of earnings increase. Surprisingly, the digitalization of the PE firms themselves and their funds have been less in focus. This delay is explained to other existing challenges that the industry deals with and the lack of existing technologies. While there is not a single technology which converts the PE business model into a fully digitalized one, there are plenty of opportunities to introduce digital enablers to the day-to-day activities to gain efficiencies and manage scale.
Data management is a priority on the digital agenda due to increased transparency requirements from regulators, investors and other stakeholders. Collecting data from portfolio companies to build various reporting has been a manual excel-based process for too long. The complexity of this reporting combined with the pressure experienced by finance functions in PE firms to manage their costs is a major call for automated solutions to capture data and produce accurate reporting on a timely basis.
With advanced analytics, data insights help to identify targets, confirm assessments and predict trends. Specifically, PE firms see value in being able to run scenario analyses and assess risks on their portfolios. It can be used in transactions that process target and third-party data, along with algorithms and other quantitative analysis to drive fast decisions for mergers, acquisitions and divestitures. From a due diligence perspective, analytics can help to identify issues quickly and help buyers and sellers to close a deal better and faster. It supports PE firms to better anticipate evolutions of markets and companies and thus improve the entire decision process.
Many firms are just beginning to explore the capabilities of robotic process automation via test-cases to automate routine but time-consuming tasks. First introductions include AML/KYC 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 probably be among the first users of this technology.
Eventually Blockchain technology will find its way into the value chain of PE funds due to its proven and recognized ability to increase efficiency, transparency, security and speed of transactions while reducing the error rate. In an environment where PE firms continually raise more capital in a broader investor base, blockchain has the potential to replace a significant proportion of existing manual processes within fundraising and capital management.
New transparency requirements and the need to benchmark and generate trend analysis are a major call for digital initiatives, which are much more than a desire to “catch up”, but rather a paramount to the building of the successful PE firms of tomorrow.