Private equity firms whose management teams focus on data and analytics – through building a data strategy, investing in cloud and analytics capabilities, and shifting to a strong data-enabled decision-making framework – will likely outperform competitors.
Private Equity (PE) firms are facing increasing competition, inflation, market volatility, and other geopolitical and macroeconomic pressures – the confluence of all of these factors is unprecedented in recent history. In the face of these challenging market dynamics, the tried-and-true PE playbook is insufficient to increase value for investors, and PE firms risk overpaying for new deals while seeing their current portfolio underperform.
Middle market companies striving to reach the next level need strategic partners who can augment C-suite capabilities with operational experience and support strategic investments in operational transformation agendas. PE firms who are able to leverage their network of operating partners, multitudes of information across portfolio companies, and invest in operational transformation can have an upper hand in this quickly changing, dynamic market environment.
No longer can PE firms rely on a 3–5-year long-term plan for their investments; today’s pace of change requires companies to be nimble and utilize an agile mindset to capitalize on frequently changing market dislocations. Similar to how the Internet of Things enabled manufacturers to calibrate manufacturing and production facilities real time, PE leaders should leverage data, analytics, and cloud capabilities to move quickly. Decision timeframes should move from months and years to days and weeks.
Here’s a closer look at how private equity can use data & analytics, cloud capabilities, and AI to harness and integrate their data as a critical differentiator in a cut-throat market.
Use data as your secret weapon
Portfolio companies reported their top challenge in responding to private equity requests was technology constraints. It’s time to shift away from decks based on manual, ad hoc data gathering and reporting processes. PE firms have access to vast troves of data – and yet they’re often not harnessing it or putting it to use.
To start with, PE portfolio companies often have an unsophisticated (or nonexistent) data strategy. Management teams today often make decisions based on data that is disparate, unintegrated, and uncleansed. While leading management teams are necessary for operational excellence, PE firms and their operating partners increasingly need to provide strategic guidance to the portfolio companies’ C-suite to enable a more active value creation agenda. Private equity firms whose management teams focus on data and analytics – through building a data strategy, investing in cloud and analytics capabilities, and shifting to a strong data-enabled decision-making framework – will likely outperform. A strong data strategy allows Management and operating partners to evaluate the effects of strategic shifts in a near real-time basis rather than having to wait for the financial results to manifest themselves over several months. They can gain insight into how decisions such as pricing affect volumes and profitability across different customers and channels.
By using data as their secret weapon, PE firms can set up a strategic, seamless flow of information from portfolio companies that can be consistently mined to advise their management teams, screen new targets, and drive returns.
Digitize your efforts
According to PwC’s latest Next in Private Equity report, 40 percent of portfolio company respondents surveyed say their top priority to create value was to digitize and/or automate more areas of their company.
Meanwhile, the private equity industry still heavily relies on spreadsheets and static reports sent by email to monitor portfolio companies. Fifty-four percent of portfolio company respondents note that they use email attachments to collect data and respond to requests. Thirty-six percent write a text-only response via email. Digitization efforts can accelerate value creation plans, become a key differentiator relative to competitors, and help make portfolio companies more attractive on exit.
Private equity firms shouldn’t stop at building the infrastructure at their portfolio companies and within their entire portfolio to harness and aggregate data. To seize opportunities in real-time, private equity leaders should look to create automated, predictive analytics using artificial intelligence tools that will push traditional dashboards toward the future. Dashboards are effective in exploring and understanding businesses. However, AI takes these processes a step further to highlight issues and turn data into actionable insights. This can allow PE companies to help find weak links in their portfolio and address them immediately.
With the right data infrastructure and predictive analytics tools, PE firms and their portfolio companies will be able to test hypotheses in real time. No longer will investment performance unfold with explanations of “what happened” driving future decisions – operators and investors should be proactively making data-enabled decisions to inform their pricing, channel, and other operational choices to create value on the offense rather than the defense.
Leverage the cloud to unlock the power of data
Historically, the issues with gathering the data necessary to perform the advanced analytics arose from disparate data sources from antiquated systems that did not interface. The investment needed to deploy large-scale systems that were needed to have a unified data set were not supported by a self-evident return on that investment. With the maturation of cloud offerings, adding a new cloud layer has proven to help reduce costs, simplify architecture, and harmonize operational and financial data.
Once portfolio companies are able to harness their own data, PE firms will be able to help drive more uniformity and build their own data management and analytics strategy across their entire portfolio. Firms who capitalize on the wealth of information at their fingertips – across their portfolio companies’ sectors, geographies, employees, end customers, and suppliers – can gain a competitive edge. Not only can PE firms be better prepared to advise their portfolio companies and arm the C-suite and operational partners with the information and tools to create value, but they will be able to screen potential target companies at speed and potentially before they are even on the market.
If private equity firms execute on a data and analytics strategy for their individual portfolio companies and across their portfolio, they can have a competitive advantage. However, if their data and analytics strategy stops there, they’ll be leaving a lot on the table. Using the power of the cloud and combining portfolio company and alternative data sources can unleash the full potential of predictive analytics; from deal screening to value creation and ultimate investment realization, the right cloud strategy can transform the wide spectrum of private equity activities.
For example, over 60 percent of portfolio company respondents say they still build a deck to report data to screen acquisitions. While this is a tried-and-true method, the reality is that decks and reports are lengthy, time-consuming, and limit the depth of insights that can be derived.
Imagine a private equity portfolio company with robust data and analytics reporting capabilities, augmented by their sponsor’s access to information across the portfolio as well as third-party datasets; they will be able to move with unprecedented speed to analyze a potential target’s operations, market penetration, pricing power, service offering differentiation, cost structure, etc. The ability to leverage the cloud to bring to bear third-party and proprietary data can allow potential buyers to identify a target company’s strengths and weaknesses as well as potential white space and value creation opportunities before the due diligence process kicks-off in full.
In addition to drastically reducing acquisition screening time, PE firms should utilize cloud technology to derive meaningful insights from real-time data sources, which can better inform decisions across their entire portfolio.
In the near future, portfolio company cloud capabilities will likely become table stakes – portfolio companies without sophisticated cloud capabilities will be increasingly hard to unload or won’t draw top dollar.
Build a culture ready to use data
All of the strategies discussed above are intended to democratize data and put the right infrastructure in place to enable data-driven, predictive, analytics-based decision making. But the right culture and talent pool is required to unlock the full potential of a cloud-enabled data and analytics strategy.
Almost 70% of portfolio companies’ respondents agree or strongly agree that their company struggles with talent acquisition and retention. In this fierce talent market, private equity firms should adjust their workforce strategies to attract and retain digitally skilled employees who can envision and enact a new approach to cloud and data.
Private equity leaders should invest in recruiting and retaining top talent to close the digital knowledge gap. The most data-savvy professionals should be incentivized to transform ways of working and to feel a sense of ownership in making smart changes. Critical sources of data should be accessible across portfolio companies so managers can share leading practices, understand the business better in real-time and make more informed decisions to improve performance.
While a company’s culture is often fostered from the top-down, change often arises from the bottom-up. Managers should feel responsible for creating a data-centric culture from the earliest onboarding stages – one where workers feel empowered to solve issues with data-based tools and insights.
Additionally, portfolio companies’ management have traditionally viewed data requests from private equity investors as tasks to fulfill rather than strategic opportunities to create a more robust relationship that could yield huge benefits. Smart managers at both PE firms and their portfolio companies should embrace the premise that more fully integrated data drives faster value creation.
Beyond building a culture that is data-savvy and ready to embrace change, prospective employees also expect in-depth training and upskilling for their own career advancement. In the ongoing race for talent, a culture that invests in employees’ digital acumen and fosters innovative problem solving at all levels can be differentiated to current and prospective employees.
Bringing it all together
Technology is key to reshaping the way private equity firms run their business operations, assess their market opportunities, and derive the greatest value from their investments. By leveraging integrated systems within the cloud that unite different tools such as analytics, data automation, and reporting, private equity leaders Can start to see the evidence of how new digitization strategies can work across areas to deliver stronger returns.
Establishing thriving digital capabilities means building a data-centered culture that focuses on creating simple solutions to big problems. This only works with the right talent and resources in place. Managers should seek out new talent to bring in new skills and upskill existing employees who are willing to embrace the change.
There is still a long way to go before private equity becomes fully vested in technology’s role in supporting deal making and staying ahead of the competition. This remains a very relationship-driven industry. While the pandemic has accelerated the pace of digitization, it’s barely scratched the surface from an operations perspective. Tremendous opportunities are there for the firms with the vision to seize them now.