Private equity investors make a living placing bets on emerging trends. The playbook goes: find a trend, study it, be one of the firsts to capitalize it, and hopefully reap the rewards as those trends become more widely adopted.
Over the last decade, for example, PE has aggressively pursued investments in technology. This year alone has attracted over $50B of private equity capital across 800 venture-backed technology deals.
It’s clear that PE is all in on the ever-growing tech trend and its enticing return potential. Cost-effectively taking advantage of that tech for the benefit of their non-tech portfolio, however, is a whole other story.
Digitizing the PE Portfolio
PE firms are well aware of the rapidly evolving, digital-first solutions available to assist and scale their portfolio company’s operations. With finite resources available to dedicate to digital transformation, portfolio management teams will often need to make consequential decisions about capital and time allocation. Fortunately, there are some templates for success that firms can apply to their own operations, allowing them to take advantage of their unique position in the management and administrative hierarchy to optimize outcomes.
Digital Use Cases
Advanced data collection and analysis has become more reliable and cost-effective to deploy, which can drive meaningful growth and efficiency improvements when wielded correctly. Experience-led transformation is one such area that’s been particularly enabled. Collecting information from customers, users, or employees provides a more reliable basis for sales forecasting, inventory management, and demand planning. Consider a SaaS platform for which user pain points can be quickly identified, understood, and resolved. Product development and customer relationship resources could be focused on addressing commonly reported kinks, thereby increasing the perceived value among clients. That would improve user satisfaction, brand strength, and retention rate, which in turn have a meaningful impact on unit economics via lower acquisition costs and higher lifetime value.
Experience-led information has also been used to optimize marketing, product placement, branding, and product descriptions. A supplier of functional athletic apparel may discern from e-commerce or retailer data that purchasing patterns and customer profiles more closely match a lifestyle brand. Such a realization would influence marketing strategies, inventory planning, and future product designs. Aside from improving sales performance, better data here would potentially save enormous sums in marketing spend that would otherwise be misallocated to a market that is receiving the brand differently.
Portfolio Monitoring and Tech-Enabled Due Diligence
PE firms can also use improved analytics to really drill down into the operating fundamentals for the purpose of improving efficiency and navigating distressed periods. Firm-level data facilitates a deeper understanding of how portfolio companies buy things, from whom they buy, and the variability in unit costs or commercial terms for relevant inputs. This analysis can illuminate cross-portfolio capabilities to deliver savings, for example, by consolidating supplier agreements that can be leveraged to minimize costs across multiple investments.
In the context of private equity, improved data on operational functions is not limited to augmenting the performance of existing investments. Firms with the right AI and analytics capabilities can apply them to due diligence to assess customer behavior, automation opportunities, and potential inefficiencies. Identifying opportunities to gain efficiency ahead of time can be built into an investment thesis to forecast superior returns.
Finally, the roll-out of digital transformations must be handled correctly to deliver successful outcomes. Management should identify the most relevant KPIs, then attempt to achieve the same performance that industry leaders are notching in those relevant metrics. It is also important to avoid doing too much too soon. It is far better to start small, successfully own a digital transformation, then launch more broadly across operations. This could take the form of precise demand planning for a single SKU, nailing process automation for a single product line, or optimizing a lone important finance function, and then expanding and investing to transform operations more generally. Such an approach will acquaint management with the process, it will create a template for success, and it will minimize squandered capital on failed implementations.
Emerging technologies are impacting businesses across every industry, and failure to embrace the associated capability improvements is likely to result in competitive disaster. PE firms have an opportunity to guide portfolio companies to implement digital transformation in a prudent, manageable, and measurably successful way. Firms that are able to master AI, machine learning, data collection and analytics, and automation could enjoy superior returns within individual investments and across the portfolio as we enter an era of rising CIO value.