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It’s digital or bust for the private equity sector

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In 2010, the global top ten companies with the biggest market capitalisation globally included just two digital firms – Microsoft and Apple. Today, seven of the top ten are digital players.

This was the opening gambit of Markus Maschek, Partner and Co-Founder of Marondo Capital in his presentation on digital transformation in Private Equity at SuperReturn International 2020.

“The total cap of the biggest 10 has grown from 2.3 trillion to 9.3 trillion dollars. But if you look at the digital part here, it's really more like 16 times x of what it used to be 10 years ago,” he continued. “The traditional companies also moved - by about two x. So, you can really say digitisation has created unprecedented wealth over the past 10 years simply looking at the league table.”

Making a giant leap

While public companies have shown the benefits of digitalisation, the Private Equity industry’s own technology transformation is still nascent, with many still relying on analogue methods.

“A lot of people will have one person who's managing their portfolio and giving them information on portfolio as and when required, which is a really archaic way of doing it because people say: ‘Well, can you know can you find me x information?” and a week later someone gives you a report,” said Hugh Stacey, Executive Director, Investor Solutions at IQEQ, describing the state of the industry.

For PE firms, one boon of digitalisation is the ability to generate greater efficiencies. Regulatory demands are a driver here, but also the ballooning amounts of data companies need to process.

One area where this is particularly evident is due diligence: as Daniel Schmidt, CEO of CEPRES, showed, the number of data points that need to be evaluated during the due diligence process is growing dramatically, from 50 in the year 2000 to 500 today, and an expected 1,500 by 2030.

Schmidt pointed out that today, an investment manager would need 10 days for this analysis; in 10 years’ time, without the help of technology, it would be 775 days.

“Only if we're able to implement technology, will we be able to run our business in the next 10 years in this industry,” he emphasised.

Differentiation is key

Beyond the efficiencies and insights technology can bring to the PE world, it can also support differentiation strategies. With growing numbers of PE companies courting investors, offering value-added services is viewed as a key point of competitive difference.

One way GPs could demonstrate value-add to their LPs is by opening up their own internal portfolio dashboards and associated analytics to their LPs.

As Nicolai Wadstrom, CEO and Founder of BootstrapLabs, pointed out, LPs often don’t have a consolidated view of their holdings and their exposure, making it hard to judge the impact of an imminent IPO, for example. The ability to access the PE firm’s own systems to get a holistic view of their investment portfolios could be a major differentiator for the LP.

Disrupt or be disrupted

It goes without saying that the same technologies can also be applied to portfolio companies to help with their growth and create value in the process – much in the same way that the majority of the top ten market caps have succeeded by applying digital models.

What’s important is that the PE sector must move quickly in order not to get left behind.

Nicolai Wadstrom of BootstrapLabs cited Kodak as an example of what happens when you don’t act quickly enough. Kodak invented the digital camera to replace traditional film, but never figured out how to take the concept to market. “They invented their own successor, but they could never figure out how to monetise that.”

Examples such as IBM show that it is possible to reinvent yourself, providing you move quickly, before others do.

The learning for the PE industry is clear: “Unless you are willing to disrupt yourself, somebody else will,” Wadstrom said.

What the future holds

That said, digital transformation is complex and costly – both for the PE firm and its portfolio companies. They need to invest in infrastructure and talent – with experts few and far between - but uncertainty about ROI and timelines for value creation through digitalisation make it hard to predict outcomes, as Markus Maschek of Marondo Capital pointed out.

He envisages the sector not only adopting new technologies but also new ways of working, where collaboration across functions, diversity and data-led decision-making is central. He also foresees PE firms developing greater niche expertise in the process. “In the future. I think you're either small and highly specialised, or you are really big. Size matters, scalability matters.”

The fundamental realisation, however, Maschek concludes, is that “Digitisation is mandatory. You can't avoid it. You have to do it otherwise you disappear.”

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