What digital transformation can do for private equity

Embracing digital transformation not only improves internal business processes, but also helps private equity firms identify the best companies for investment

The private equity business is built around the concept of investing in the most promising companies. They may not have the best financials at the time of investment, but they need a viable strategy for continued revenue growth. Having a digital strategy is central to this. Without clear plans to automate manual processes and bring business online, most companies are unlikely to merit much attention.

Ironically, many private equity companies have not yet managed to digitise their own internal processes properly. They might look to invest in companies that demonstrate an understanding of advanced technologies and the benefits of automation, but they often rely on manual processes to assess prospects, engage with staff and counterparties, and process transactions.

Firms that have invested in their own digital capabilities have the expertise to help struggling businesses to identify the best ways to use digital to reduce costs and increase revenue

“Every sector in the business world either has already been digitised or is going to be digitised very soon. Private equity is an industry that also needs to embrace digitisation, both in our own firms and equally importantly in the investments we make,” says Christian Sinding, deputy managing partner and head of the equity advisory team at EQT, a global private equity firm.

Digitisation of private equity firms has a range of benefits

Opportunities for digital transformation exist across all aspects of private equity investment. In a recent survey by KPMG, respondents suggested fund accounting, risk and compliance, portfolio risk management, and big data analytics were the areas most amenable to digitisation. Other functions that might also benefit include due diligence, client onboarding and customer relationship management.

Every firm is different, of course, and some are more advanced than others, but it is generally recognised that the digital transformation of private equity could not only bring internal efficiencies and improvements, but should also help individual firms to become more adept at identifying and investing in companies with the greatest digital potential.

“Effective digitisation should enable private equity firms to support businesses of all sizes and in all states of health through their individual growth stories. Firms that have invested in their own digital capabilities have the expertise to help struggling businesses to identify the best ways to use digital to reduce costs and increase revenue,” says Mike Mills, deal advisory partner at KPMG.

Most sectors have now passed the stage where being digitally advanced was simply a competitive advantage and it is now very often an essential attribute for survival. For the private equity industry, this is particularly important not only because firms must look to digitise their own processes, but also because they may want to avoid investing in companies that don’t have digital ingrained in their DNA.

EQT innovation shows what could be achieved for private equity firms

At EQT, the digital transformation of private equity is now well underway with the transition to cloud-based working over the past two years and adoption of widely used tools such as Dropbox for document-sharing and Slack for team messaging. The firm’s greatest innovation is Motherbrain, an advanced system that enables it to sift through large numbers of companies to find possible investments.

“Motherbrain leverages big data and machine-learning to identify those companies that are gaining traction and being disruptive before they become widely known. It has allowed us to become a much smarter investor and to outperform our competitors through very robust automated due diligence on every single investment,” says Mr Sinding.

Examples of proprietary systems such as Motherbrain are still few and far between in the private equity world, but they show how the use of advanced technologies can help to bring internal efficiencies while also making sure the most digitally advanced companies are quickly identified for investment.

Firms should start by assessing where they sit on digital spectrum

Following its recent survey, KPMG suggests private equity firms should begin their digital journeys with an assessment of where they sit on the digital spectrum and development of a digital strategy. Core functions, such as investment selection as well as the management of portfolio companies, should then be upgraded with digital capabilities.

KPMG believes a talent strategy should be developed to ensure a firm’s staff has appropriate digital expertise in place. At EQT, for example, a 15-strong team has been built up to support the digitisation of portfolio companies, help with due diligence and train the firm’s staff to understand digital signals in the market.

“Digital transformation is vital and it is increasingly clear that all businesses should consider it. There are a small number of private equity firms that have teams dedicated specifically to digital transformation, while others are just starting to address the digital agenda,” says Mr Mills.

“There are now so many opportunities to reduce costs and make greater advances through robotics and artificial intelligence, but there is still a way to go to deliver the true power of digital transformation across many private equity firms.”