The Digital Paradigm Shift for mid-market Private Equity Firms

In today’s hyper-competitive world, Private Equity (PE) firms need to focus on executing a sustained digital transformation strategy for building a data driven due diligence capability, enhancing operational efficiencies and accelerating top line growth in portfolio companies. PE Firms also need to have a focused approach to attract and retain skilled digital talent to execute on digital transformation. The need for digital transformation is especially true of PE firms focused on mid-market financial services vertical. Mid-market financial services firms face a unique challenge: being sandwiched between smaller, agile, well-funded fintech startups and stable, well-capitalized, trusted large firms. To top it off, non-financial services platforms like Amazon and Alibaba are consistently looking to gain footing in the sector.

 In a recent study by Price Waterhouse, digitization is high on the agenda of private equity firms as a critical mega trend influencing new investments of PE house; however, the PE firms are still lagging behind in transformations that would offer real benefits.

 I would propose that   Digital Transformation is to PE Firms what Financial Leverage is to Hedge Funds – a must have, competitive advantage in portfolio selection and investing in mid market firms and offering the Operational Transformation and Growth Acceleration engine ‘secret sauce’ to generate alpha.

A number of leading firms have continued to build talent and capabilities to support the digital paradigm shift. Blackstone, as an example, has created a data initiative team focused on data science, big data and advanced analytics. The team partners with the firms’ investment professionals to improve the investment process, make new investments and optimize existing portfolio company operations. The teams are looking at data to drive better valuations and competitive bids and helping them decide what to buy and how much to pay.

At EQT, one of Europe’s leading private equity firms, the digital transformation has led to the firm transitioning to a cloud based system which sifts through late datasets to find possible investment opportunities.

What is Digital Transformation?

 Digital Transformation continues to have a wide variety of definitions and what it means. In discussion with clients I have seen that successful digital transformations can be broadly broken down into five key buckets:

1. Scalable Digital Platforms which includes Open Platforms, Robust API strategy, and a cloud first approach to building and replacing legacy infrastructure.
2. Robust Data Strategy which includes governance, tools, Artificial Intelligence (AI) and analytics to leverage internal and external relevant data capabilities to drive actionable value out of data.
3. Customer Centric Experience – Keeping customer needs and expectations at the center of digital transformation and offering a seamless and frictionless user engagement layer across channels. Tech companies such as Amazon, Apple have set the bar for digital customer experience, and the expectation today is that regardless of the products and services offered, the user engagement layer has to be at par.
4. Scalable partnership and innovation ecosystem to leverage capabilities of partners, fintechs, and startups to experiment integrate and scale innovation.
5. Building and Retaining Digital Talent, creating reskilling opportunities for existing employees and a digital sourcing strategy for external talent is key to doing digital transformation right.

Addressing Operational Transformation and Growth Acceleration

PE Firms look at Operational Transformation and Growth Acceleration tools to drive value in their portfolio companies.  Digital Transformation addresses this across the two key drivers:

1.  Operational Transformation: Digital tools offer unprecedented capabilities for automation, data analytics, rich user experience and customer centric competitive tools to organization for operational transformations. From contextual ChatBots to robotic process automation (RPA) agents, companies can entirely transform their operating model cost effectively.

1. Growth Acceleration: Engagement Layer or User Experience capabilities offer tremendous opportunities for PE firms to drive revenues and customer experience by leveraging digital and platform strategies for newer products, newer customer and geographies and retaining existing customers and newer channel of distribution. Infrastructure tools such as Cloud, Platforms offer ability to create scalable operations and right partnerships/innovation ecosystem and M&A ability for technology/fintech players to leverage opportunities.

Priorities for the Digital Shift of Mid-Markets Financial Services

 Apple and Amazon have shown us that what customers value more than anything is a simple, seamless experience.  What is common across all effective digital experiences is the engagement layer. Banking customers are increasingly bypassing physical channels to exclusively interact with their banks via digital platforms.

 A recent study done by BCG showed that digital is a key priority for mid-market banks.

In an industry that is generally slow to adopt new technology, the right digital transformation and partnership can help mid-market firms be competitive in their digital shift given limited resourcing. This can involve leveraging the strength and infrastructure as a service of large institutions to compete or considering no-code platforms such as Unqork, Caspio and Nintex, which reduce the cost of IT infrastructure needed to offer newer products and be agile in service offering.

Private equity has relied on traditional investment, due diligence and portfolio management and has been hesitant in changing; however, with the squeeze from nimble startups, customer digital expectations, and line between competition and partners blurring, digital transformation has to be the key for growth in mid market companies. Those that resist change risk being outranked by their competition, losing industry relevancy, and being replaced by more technologically savvy, nimble competitors.

Digital Transformation Done Right is the PE Firm’s ‘Secret Sauce’ to a must have competitive advantage.