The Power of Digital Transformation for Private Equity Portfolios
Sep 29, 2020 | By John Siegel
The right tech stack can do wonders to increase a company’s efficiency and create operational value. Oftentimes, however, this can be easier said than done. Between lengthy research processes, extended implementations and training sessions, and the chance staff buy-in isn't complete, these sorts of transitions are sometimes met with reticence — or worse: Delays.
But for private equity and venture capital firms, the right technology integrations mean more than just added efficiency and more accurate numbers being reported (and quicker): It adds value to portfolio companies that can compound over time as the portcos fine-tune their new processes.
This is a great goal for any company, but it’s an absolute essential for private equity firms looking to increase the value of their portfolio companies.
Recently, private equity due diligence and ERP execution provider Trajectory published an in-depth whitepaper — featuring FloQast's-own Marc Craver and ST6's Casey Connor — that takes a look at how the right ERP systems and supporting ecosystem of technology integrations can impact portfolio companies over time. Here are a few of the key takeaways.
Whenever you have a highly competitive environment, it becomes even more important to look inside to create improvements. With the private equity game becoming more competitive, firms need to find new ways to create operational efficiency and increase internal value. Digital transformation is one of the best ways to go in many cases.
Not all portfolio companies will benefit at the same level from digital transformation. Obviously, some will already be operating with the right technology, while others may have problems beyond technology that will hold them back regardless. During due diligence, wise PE firms are on the lookout for technical debt. Portfolio companies with technical debt may be running inefficient legacy systems that are costly to maintain, inflexible, and cause delays, often at just the wrong time.
When companies have a large amount of technical debt, the systems and tools they’re using are the weak link that holds them back. By implementing the right ERP ecosystem, savvy firms can unlock the potential of these portcos and see an explosion of new value.
The Right Stack at the Right Time
Of course, there isn’t one perfect ERP or one perfect tech stack for every company. Each company’s unique needs will dictate the technology they need to succeed. PE firms would do well to segment their portfolio by vertical, size, and stage of life to get a better idea of which systems to implement and which potential portcos may be good targets.
If your firm focuses on a specific vertical, it may be much easier for you to use the same apps and systems across most of the companies in your portfolio. Just make sure that everything is a good fit before diving in.
Historically, many PE firms have waited too long after acquisition to get involved in operations. When it comes to digital transformation, the sooner the better. The right ecosystem components should be chosen during due diligence and you should be ready to implement the new systems from day one.
It’s going to take some time to get everything in place, but that’s all the more reason to start right away. The sooner you start, the sooner things are running smoothly and the more time you have to build value with the new system in place.
Don’t Let Your Own Firm Get Left Behind
Of course, while we’re talking about the technology in your portfolio companies, we don’t want to forget about your own. If your private equity firm is running an outdated or outgrown system, a new ERP ecosystem could do wonders for your operations as well.
Flexibility and cloud integration are a huge advantage when you work across the country and have people out in the field. And the right applications make all the difference in terms of visibility, forecasting, and analytics on your financials.