Investment In Digital Is No Longer Optional for Private Equity

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82% of Private Equity General Partners view mature digital investments as value driver at exit. This is according to findings in a report by West Monroe, published last week. 

“There is a real recognition that digital transcends the typical perception of ‘having a website’ and asset owners are coming to understand that digital infrastructure is playing a huge part in value creation,” says Fleur Hicks, Managing Director at onefourzero.

A focus on digital is highly effective in delivering efficiency improvements, revenue and earnings growth. Regardless of the maturity of digital processes at the end of the hold period – ensuring a higher pricing multiple at exit. Organisations which have in place a clear and widely understood digital vision, according to the West Monroe report, are more likely to boast strong growth rates and higher profits, 45% demonstrating over 40% growth per annum. Companies within the middle market achieve an average of 27.5% ROI on digital projects (which rises to 39% for those that spend 10% or more of their revenue on digital).

Still holding back?

Whilst savvy PEs are, indeed, waking up to the fact that a digital infrastructure is a crucial element of value creation in portfolio companies across all industries, many are still not realising their full potential. So, what’s holding them back?

“With digital increasingly forming a key component of diligence, there is clear value for both buy and sell sides to understand or demonstrate the impact of digital enhancements for on- and offline commercials,” says Ben Martin, Senior Insights Director at onefourzero. “By combining big data, analysis and the experience of our former digital practitioners, we are well placed to evaluate, model and assist in implementing these enhancements.”

50% of respondents surveyed in the recent report said that making improvements quickly enough to have an impact before the end of the hold period is the greatest barrier preventing them from implementing digital transformation. What’s missing from the mindset here, however, is that intrinsic definition of value creation in its true form. Whilst all the improvements may still be a work-in-progress by the end of the term, implementation early on allows PEs to forecast based on demonstrable activity over the term.

Rather than holding back out of fear, ‘sooner the better’ is the attitude to take to digital. Whilst some specific digital enhancements can yield almost instantaneous results, the report states that it takes an average of three years for digital investment to deliver results, so those 84% of PEs which aim to implement a digital program at a portfolio company within a year, and indeed those 26% which are trying to do so within 6 months of acquisition, are best placed to see results. 

One main reason for failure in digital transformation is the lack of a growth mindset within a company, and a cultural shift towards this more progressive way of thinking is integral to success. One cannot underestimate the value of digital, particularly at this point where customer expectations are at an all-time high and the speed of technological advancement is pressuring management teams towards optimum agility.

Transforming all sectors

One common misconception regarding the implementation of digital strategy is that it is more applicable to B2C than B2B businesses. This is probably because digital transformation is aligned, in the minds of many, with the idea that its principal value is in meeting customer expectations. 

Whilst customer experience is absolutely a key driver in the success of digital transformation, the B2B space is hugely reliant on technology. Whether this be in supply chains – where automation of manual and low-skill tasks by the use of robotics is elevating human workers to more meaningful roles whilst speeding operational efficiency – or in inventory management and forecasting with the use of machine learning algorithms, B2B operations are arguably even more in need of digital disruption than the B2C sector. Let’s not forget, for example, that the Manufacturing industry is one of the largest users of IoT technology.

Looking back at B2C, 40% of PEs prioritise digital investments that enable the company to keep pace with those demanding customer expectations. Whilst this is admirable in some ways, those 18% which focus on reducing operational expenses, and the 25% which prioritise workforce productivity, may fare better. 

Strategies which prioritise workforce productivity are faster to implement and produce value, and reducing operational expenses show benefits almost immediately. Customer-facing transformations, however, take far longer to see results (relying on time to launch and time to consumer adoption before finally seeing sales translating to growth). Making changes behind the scenes which show faster results have a knock-on effect, positively influencing customer experience by proxy. After all, backend ops and customer experience are symbiotic.

Outside help

33% of General Partners (GPs) report that less than half of their companies are even internally capable of implementing a digital program. Of course, this means that the PE has its work cut out to get the company prepared, and many do not have the knowledge resources in-house to identify, never mind enact, those necessary changes themselves. That’s why 53% draw on outside consultancy from experts in order to plan and implement digital strategy.

This is what onefourzero is here for. Digital due diligence, performing deep statistical analysis from across the digital realm, is what allows us to make informed and actionable recommendations on how to utilise the power of digital to deliver revenue, earnings and higher exit value. We draw on online sentiment analysis, perform explanatory and predictive modelling, and inform PEs on which areas of digital will show the best results for their particular portfolio companies. 

Every business, as we often say, is a digital business, because audiences now are digital natives. Despite some of the reluctance in some areas of PE, the majority have already recognised the potential that digital has to offer. Now, it’s time to look at how to realise that potential.