Tech upgrade often crucial for investors who want to sell within a few years of acquisition.
Companies that undergo digital transformation can become more attractive for investors but when it comes to businesses owned by private equity, time is of the essence.
Private equity owners are often in a rush to transform analogue enterprises into companies that have been thoroughly modernised using technology, as they consider this crucial for their strategy of increasing the value of a company before selling it within a few years of acquisition.
Digital transformation of a business, industry experts say, results in one that uses technology — from artificial intelligence to data analytics — to improve its products and services and ultimately its revenues. However the execution of such structural transformations can also come with challenges for the private equity sector.
Silpa Velaga, chief financial officer at Apax-owned Authority Brands, is acutely aware of how digital businesses, particularly those bought by private equity initially as mostly analogue-run firms, can lead to lucrative returns.
“We use the power of technology not just to change the nuts and bolts but to provide better management,” she says of a home-services franchising business that serves large sections of the US market.
Ms Velaga says Authority Brands, whose franchises include cleaning and plumbing services, has focused on developing business intelligence. Owners of the franchises have access to a dashboard where they can monitor key performance indicators (KPIs), she explains. These metrics include return on investment in marketing campaigns, sales over a period of time and what is driving sales and profits.
“By providing KPIs using technology we help the owners better grow their business, which in turn generates revenue for us,” she says. “Business owners can focus on execution without having to spend time interpreting the data.”
Ms Velaga says another benefit of the digital transformation the business has undergone is that the real-time data allows for a quick change of strategy if the company is heading in the wrong direction.
There are benefits further down the line too when it is time for the private equity owner to sell. “A buyer is always going to want to know how we used technology to support the operations of the business,” she says.
Apax is one of a number of private equity groups keen to exploit the potential of digital transformation for portfolio companies. Pollen Street has been leading such structural transformations for years, including at Oplo, an English lender it bought in 2016 aimed at people “underserved by mainstream lenders”.
Lindsey McMurray, managing partner at London-based Pollen Street, says the use of software to understand consumer behaviour is crucial to the way the company operates now. “We use technology to be fast and nimble and to understand our customers and why they may have missed on payments,” says Ms McMurray.
She says that, as a small lender, Oplo has benefited from changes in European law to force big banks to share data about their customers. “We use tools that categorise the data, interrogate the bank account of a person to understand their income, expenditure and challenges, like a gambling habit for example.”
She says there are obstacles, mainly when it comes to changing the culture of a company so that employees embrace change. Ms McMurray says it takes decisive leadership to instil the new belief among staff “that doing things digitally is a necessary component” of the future of the business.
But she warns that digital transformation should not just be about replacing people with machines. “It is not about taking out the fabric of the business. It is about questioning how to do things better,” she says.
Beyond cultural challenges, experts point to specific difficulties when it comes to digital transformation at private equity-owned companies.
Bruce Sinclair, author of The Private Equity Digital Operating Partner, says that in order to get the best return on investment private equity owners need to choose well the company they want to digitally transform.
Mr Sinclair says: “Choosing the wrong portfolio company is the first mistake that must be avoided. Private equity firms should choose a traditional portfolio company that has done business the same way for decades in an industry that has done business the same way for decades.
He adds: “This usually means the best portfolio companies for private equity to transform are non-tech, traditional, mature companies in traditional markets that haven’t been digitally disrupted yet.”
Source: Financial Times
By Javier Espinoza
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