PE must adapt to thrive over the next 5 years
The traditional PE model relies on tried-and-true methods that can fall short at every step of dealmaking in today’s superheated, competitive environment. That means firms using traditional methods risk overpaying for a deal and seeing companies underperform during the hold period. Here’s why:
To survive, private equity firms should think differently about data and cloud
The key is data. While it’s abundant in every company, it is often ignored, misunderstood or misused. It’s a secret weapon that can solve for several issues at once. Massive growth is putting more eyes on PE firms, and building a data strategy can solve for the market’s transparency demands and can help transform your business at the portco level to create the returns investors expect.
Why private equity data has become urgent
In a word: speed. The right financial, commercial and operational data, delivered in a timely way, can help firms navigate strategic shifts or pursue a current strategy more aggressively. The right data means that CEOs and CFOs don’t spend as much time parsing through spreadsheets, freeing them to use their time to enhance value and stay competitive.
Many executives spend time refining already-sophisticated business plans, but may lose sight of what’s driving real value creation. That’s where data is critical. PE firms can find their data too scattered, or they may lack the talent and digital prowess to productively harness and integrate their data. This often just requires a willingness to use new sources of information and analysis that can make better use of data that is already available.
Why you may not be ready for the future
Having data in hand is one thing, but can you analyze it? That may simply involve leveraging a few new, strategic digital tools. Employees at funds and portcos must also track the right data to identify issues and opportunities early. That’s a talent issue that grows more critical over time. Building these capabilities on data analysis can force you to rethink your traditional PE model from the ground up. If you have the ability to do deep analysis into a prospective company before you get a single piece of due diligence data, why would you continue using the same playbook as everyone else?
How do I build a data transformation strategy at my portfolio companies?
Making data part of daily operations starts with determining your existing capabilities and improving those. By changing portco data collection, how and what data they analyze, and empowering their workforce to use data, you have the potential to make digitization a major differentiator from competitors and make portcos more attractive on exit.
Change how you get data from your portcos
What to do now
- Make sure it’s the right data. It all starts with a business problem or strategy question. What data do you want that you don’t yet have the capability to produce? Prioritize data needed to track, monitor and support your plans. Maybe it’s needed for reporting, or perhaps you want to know which clients are profitable and which are not.
- Build in quality controls. Make sure data is double-checked for mistakes after it is in the system. Data doesn’t always need to be perfect, but it needs to be reliable for analytics and useful for helping solve problems. Even a typo can make a big difference. Data is often centralized, but no one is responsible for ensuring it is clean and up to date. Appoint a company data chief. And don’t try to fix all your data problems at once. Start with the most crucial for business operation.
- Decide how often to collect data. It shouldn’t be a one-time event, but should be automated and frequent. Make sure everyone in the company shares the same data and that numbers match up so that the sales force and executives are sharing the same data with prospective clients, vendors or buyers.
What to expect in 5 years
- Some systems may become sophisticated enough to compare your business with peers, making starkly clear your advantages or disadvantages. You may also be able to run programs that can assess digital strategies that have worked in the past, to see if a similar strategy could work for your company.
- Each firm will need to think about how to house, access and manage data. For your data strategy to reach its potential, cloud technology will likely be needed.
- A seamless data flow, from portco to PE firm and vice versa, includes comparisons to third-party data. Everyone at the company and PE firm is then able to get on the same page quickly and easily.
Use both portco and alternative data strategically in your analysis
What to do now
- Tools exist on the market to give you an instant, sophisticated analysis of the data you have. The cost is minimal, and the benefits are high. This doesn’t have to be a massive, expensive overhaul. Just build basic infrastructure that helps you better understand your business. For example, you may discover that one portco is paying twice as much for the same inventory item as another portco.
- Don’t get drunk on your own data. A trove of data is likely available from external sources such as partners or vendors, or it may be for sale from aggregators. Some data is free from public sources. This data may include credit card spending, loyalty card data, real estate vacancy rates and any number of atypical collections. Using that data can help a firm place a prospective company in its market before any due diligence is received, potentially leading to a quicker decision on the asset.
- Make sure your data straddles systems. Most companies generate tons of data, yet very little of it is connected across financial, commercial and operational systems. If it were connected, that data would enable companies to gain clarity and better understand what drives value.
What to expect in 5 years
- Instant dashboards are just one step and may not be the solution you need. Dashboards are a medium to help explore and understand a business. What’s needed is actionable insight, which could come via a dashboard but also, for instance, through an AI tool or database technology (such as SQL). And automated, predictive analytics have the power to highlight portco issues, turning a few data points into a decisive insight.
- The goal is to aggregate key data that is often already scattered in disparate systems across portcos and display it in usable form to make better decisions in real time. Analytics should highlight specific issues to tackle across your portfolio of companies based on the latest results.
Develop a cloud strategy
What to do now
- Get into the cloud. Leaders have largely snubbed cloud investments because they were expensive and complex, requiring years to convert legacy systems to digital. That is no longer true. In the last two years, cloud setup costs have plummeted. One reason: Cloud companies are so eager to grab market share that they’re willing to subsidize system upgrades. Simultaneously, it is simpler than ever to convert. Now a teenager with a credit card and beginner’s knowledge can set up an account and do what once took millions of dollars to accomplish.
- Bring cloud to fund-level reporting. Create a pipeline of information to reduce reporting time.
- Unleash a company’s financial planners to help provide rapid feedback. Instead of fixing spreadsheets, they can be freed to do more strategic thinking, examining customer acquisition cost, churn and other issues.
What to expect in 5 years
- Traditional companies will become more like digital ones, gaining competitive advantage through the ability to more quickly analyze data to make better decisions and seize opportunities. Companies in the vast middle today will increasingly be squeezed, either to carve out a niche business or to scale up digitally to compete with giants. Go big, go small or go home.
- Cloud will be an essential element when pitching the sale of a portco. Portcos without sophisticated cloud capabilities will be increasingly hard to unload or won’t draw top dollar.
Build a culture ready to use data
What to do now
- Hire for critical gaps in knowledge. Upskill employees to close the remaining digital knowledge gap. The most data-savvy should be incentivized to create new ways of doing things and to feel a sense of ownership in those changes. PE firms should start now to make key data accessible across portcos so that managers can share best practices, understand their business better and improve performance.
- You can’t just add a data scientist without a significant change in process or governance. This has to be a management-led revolution in order to reap the rewards. Employees need to be trained and upskilled to handle increasingly complex data tasks. Portco management traditionally has seen data requests from PE firms as tasks to fulfill rather than strategic opportunities to create a more robust relationship that could yield huge benefits. That traditional mindset means data remains scattered in too many silos to be useful. Smart managers know that better, more fully integrated data drives faster value creation.
What to expect in 5 years
- Hire and promote people who are data-centered and data-savvy. You don’t need a team of data scientists but a team of people ready and willing to use data to find and solve problems. Teams that succeed welcome the idea that things have to be done differently to achieve better results. A data-centered culture focuses on creating simple solutions to big problems. Better data systems can also help companies make up for significant talent shortages.
- Get ready for the “democratization” of data tools and the workforce. The idea is to arm the entire workforce with the same analytical tools as data experts. Creative problem-solving can come from any employee. But first, managers need to create a culture in which workers not only identify problems but are encouraged to solve them with easily accessible data tools. This is crucial because the gap of knowledge between data-savvy employees and everyone else is expanding every day. This effort starts at the beginning: How employees are onboarded, mentored and upskilled has a tremendous impact on creating a culture that embraces change.
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