Digitalization: Shaping the future of private equity

​​​Digitization is having a profound effect on the world of private equity. PE funds are leveraging technology to make better investment decisions and drive digital transformation at the portfolio company level.

According to EY’s Global Divestment Study 2020, 61% of respondents said their firm had captured operational efficiencies around technology, and 72% had leveraged analytics for pre-sale preparations in their most recent sales.

At the same time, 73% faced challenges in understanding how technology affects portfolio company value. And 80% said consistently using data-driven analytics to drive decision-making is a challenge when conducting portfolio reviews.

Jed Gardner, IT Transformation Director, Linedata, has advised PE firms on their digital transformation strategy for over 7 years.

Jed recently joined the ‘Future Trends in PE Technology’ panel at the PE Wire Live Technology Summit. He shares his key takeaways from that discussion.

It’s more critical than ever for private equity to get cybersecurity right.

We’ve been consulting and performing cybersecurity risk assessments for our private equity clients for several years and are seeing a real shift in mindset when it comes to cybersecurity. Over the last 18 months we’ve been getting much more focus with the senior partners of PE firms.

Private equity has been the target of significant phishing attacks, as covered by Forbes and others, and managers and LPs are taking this very seriously. The launches we are working with consider cybersecurity a top priority, since they realize cyberthreats present a significant risk for their investors. Hardening cyber defenses at portfolio companies, as well as protecting data at the fund itself are a top priority.

Building a digital strategy with your portfolio companies is a great way to drive value creation.

Increasingly, CTOs and heads of technology have a seat at the table at their respective firms and are becoming business leaders and contributing to the strategy for enabling digitization in their portfolios. More PE company CEOs are talking to us about whether we see portfolio company integration as a good strategy for technology/digitization within the portfolio.

We also have distressed fund managers that acquire businesses in a poor state. We help these businesses take on new technologies on behalf of the parent company to protect their investment and streamline processes for better financial performance. It’s not always about digital transformation, but helping companies put their best foot forward, such as finding ways to automate and simplify business processes.

AI is helping to redefine the future of risk management.

Artificial Intelligence is changing how PE firms manage risk. We see clients utilizing AI to identify where risks are emerging in the portfolio, at the individual Portfolio Company level.

For example, a client of ours that is heavily invested in retail has developed AI methodology to scrape data off the retail portfolio companies’ websites. By looking at how many discount offers they are putting on, and how frequently, they can spot potential cash flow issues. During Covid-19, they’ve found that to be very useful.

This comes with a stark reminder though that ML and AI need to be ethical in approach, and scraping data from emails, websites and social media needs to be a strategic compliance discussion.

When defining your data strategy, think business usage first.

AI-based data enrichment can be performed on every process, but just ‘doing AI’ doesn’t necessarily add value. It’s important for the CEO or CIO to establish the vision before bringing in data scientists – otherwise you’ll just be spending money and increasing the amount of information that needs to be reviewed as part of the decision-making process.

With data analytics there’s always the risk of apophenia – the tendency to perceive meaningful connections between seemingly unrelated things. To help our clients maximize the benefits and ROI of data analytics, we use business-savvy technologists who are skilled at analyzing large data sets and deriving actionable insights that address business opportunities and pain points. They’ve stacked up pretty well against data scientists, who are brilliant theoreticians but can lack business and operational knowledge. Ultimately, the key is applying intelligent use of data and ensuring your team approaches it the right way.

MSPs can play a vital role in helping PE firms realize their digitalization vision.

Not everyone is at the same stage of tech adoption when it comes to integrating new technologies such as public cloud, artificial intelligence, and machine learning. Forward-thinking PE firms often centralize their technology under their CTO or Chief Information Officer, who provides the vision and leadership, and then utilize a managed service partner or partners to enact that vision. This approach gives you the best of both worlds – strong internal leadership, and access to the latest technology and tools without adding a lot of internal headcount.

Working with an MSP also puts you in a stronger position to learn from your portfolio companies, looking at both the good and bad things they are doing. And even if you’re just getting started and don’t yet have a CTO or CIO, you still need start somewhere. Managed services is a way to achieve that.

About the author, Jed Gardner

Jed Gardner is the SVP, IT Transformation Technology at Linedata.