Digitization can enable private equity companies to improve efficiency and minimize charges.
Private equity (PE) firms face regulatory pressure, the demand for more transparency and cost-effective charges, and growing direct and co-investments by limited partners. To solve these issues and improve efficiency, PE firms must leverage cutting-edge technologies and change their business models.
Digital transformation of PE entails the use of a combination of new technologies and methodologies, like blockchain technology, AI, big data analytics, cloud solutions, IoT, and strong cybersecurity. These innovations are a huge leap forward compared to the Excel spreadsheets that most PE businesses use.
Digital transformation utilizes the vast amounts of data generated by portfolio firms and private equity firms. It is one of the untapped sources of generating more revenue. Importantly, it holds the promise of more objective policy-making, a key benefit when markets are too volatile.
A successful digital transformation of PE firms can be broken down into five major groups:
Scalable digital platforms: They include open platforms, robust API strategy, and a cloud-first tactic for creating and replacing legacy infrastructure.
Robust data strategy: It comprises governance tools, AI, and analytics to exploit internal and external data capabilities to propel actionable value out of data.
Customer-centric experience: It involves keeping customer needs and anticipations at the core of digital transformation and providing a seamless and frictionless user engagement layer across various channels.
Scalable partnership and innovation ecosystem: It strives to make maximum use of capabilities of partners, fintech, and start-ups to pilot, integrate, and scale innovation.
Creating and retaining digital talent: Providing reskilling opportunities for existing employees and a digital sourcing strategy for new talent is essential in digitizing PE firms in the right way.
The benefits of digitizing private equity firms
Opportunities for digital transformation exist across all spheres of private equity investment. In a recent study by KPMG, the participants suggested that fund accounting, risk and compliance, portfolio risk management, and big data analytics were the sections most open to digitization. Other areas that might also benefit are due diligence, client on-boarding, and customer relationship management.
Every company is different, of course, and some are more advanced than others. Still, it is generally acknowledged that the digital transformation of PE could bring not only internal efficiencies and improvements, but also assist individual firms in becoming more proficient in identifying and investing in businesses with the highest digital potential.
“Effective digitization should enable private equity firms to support businesses of all sizes and in all states of health through their individual growth stories. Firms that have invested in their own digital capabilities have the expertise to help struggling businesses to identify the best ways to use digital to reduce costs and increase revenue,” says Mike Mills, deal advisory partner at KPMG.
Most sectors are now past the phase where being digitally advanced was basically a competitive advantage, and it is now very often a basic aspect for survival. For the PE sector, this is particularly important not only because firms must consider digitizing their own processes, but also because they may want to avoid investing in businesses that lack a coded digital DNA.
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