The Digital Paradigm Shift for mid-market PE firms

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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 megatrend influencing new investments of PE house; however, the PE firms are still lagging behind in transformations that would offer real benefits.

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I 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 a cloud-based system that 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 we 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 the organization for operational transformations. From contextual ChatBots to robotic process automation (RPA) agents, companies can entirely transform their operating model cost-effectively.
  2. Growth Acceleration: Engagement Layer or User Experience capabilities offer tremendous opportunities for PE firms to drive revenues and customer experience by leveraging digital strategies for newer products, customers, omnichannel distribution and geographies and retaining existing customers. Infrastructure tools such as Cloud, Platforms offer the ability to create scalably 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 are 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 the service offerings.

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 the line between competition and partners blurring, digital the 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 a competitive advantage.



About the Author

David Donovan
David Donovan is the 25 years of expertise working on Wall Street as an institutional equity trader, including 14 years as the sector leader of technology trading for Fidelity Management and Research when working with investment banks and asset managers. Since joining Publicis Sapient in 2005, his deep understanding of business, regulatory, operations and technology challenges facing C-suite executives, helps Donovan develop key strategic initiatives to evolve our business and improve the company’s ability to deliver transformative work.