Value creation for private equity (PE) owners has always been about driving greater deal multiples or EBITDA, ideally both. Traditionally, from our research, the two most often used levers for achieving this have been merger and acquisitions and a focus (somewhat obviously) on ensuring you have the right leadership aligned to a value creation plan running the investee company. We would argue that “technology and digital” is now a third “must do” lever for PE.
KPMG’s 2022 Market Insights Survey into value creation in the PE sector found that technology is rapidly gaining ground as the priority value creation lever. In fact, our survey found that these two strategies are expected to double in importance over the next three years.
With 77 percent of GPs planning to invest more in customer-facing digital transformation and 75 percent in data analytics, technology and data are set to play an increasing role in the investment process and ownership periods alike.
The inexorable move to digital business models was already happening, but the timeline towards that transformation has been supercharged by the pandemic. A decade of digital and data-driven transformation was condensed into 18 months, meaning tech investment has shot to the top of private equity’s to-do list, far more quickly than anyone might have expected.
Embedding tech into the investment lifecycle
Unlike some value creation levers that only really come into play at a certain point in the investment lifecycle, technology is the golden thread that runs through the full lifecycle, from origination, through due diligence, the portfolio hold period and then into exit planning. There are aspects of technology you have to get right to protect the business, such as cyber and information security. However, technology also offers the opportunity to standardise processes and provide a platform for growth, driving efficiencies in back and middle office, and seamless customer relationship and experience. You need to understand the nature of disruption and the threat of substitution. You also need to understand the potential opportunities technology creates, but also be realistic about the ROI from complex projects.
Gaining an understanding of the technology value creation angle early in the process can give deal partners and the investment committees the conviction required to underwrite a tech-led investment thesis and then give operating partners and the management teams the resources and support to deliver on it.
Done well, technology value creation can drive change at both the front and back-end of a business simultaneously. For example, KPMG was working with a B2B client where customer interactions were carried out on an entirely analogue basis. Working with that business and its PE owner, we drew up an e-commerce strategy to digitise manual processes and create a platform to facilitate interaction with customers more easily. This will enable the business to increase revenue potential at the front-end while also reducing costs at the back-end.
Identifying the opportunities
For PE investors that embed technology into their investment process, there is a whole spectrum of opportunities. These could range from using ‘software vendor/ adviser-defined best practice operating models’ to transform core functions such as finance, procurement, HR, supply chain. Or looking at where robotic process automation could drive efficiencies, reduce cost or redirect resources towards more value-added activities.
At the other end of the spectrum, a firm may decide on a more fundamental transformation, such as replacing the whole ERP to achieve the business growth plans. Or an entire technology-driven business model change, where the investment thesis is predicated on a shift into new products and new markets enabled by these digital changes.
One of the first tasks, therefore, is to decide where on that scale of transformation you should be focusing by building a model to understand, in broad terms, the relative merits and value cases of each option.
If you are playing offence, you need to identify the gap between the company’s current operations and where it could be in the new scenario, and then develop a plan to close that gap. If you are playing defence, you need to identify the capabilities and structures that could help the company absorb the impact of disruptive market change.
Creating value means increasing multiples
Technology is one of the most important value-creation levers - why? Because there is a clear correlation between businesses that are tech enabled and the prices paid when the private equity owner comes to sell. For EBITDA improvement in buy and build, typically this is consolidating ERP for efficiencies for private equity from origination through to exit. For example, KPMG is working with a B2B client that has grown via more than ten acquisitions and had a number of ERP solutions across the group. Data wasn’t available to run the business without manipulation in Microsoft Excel. We have worked with that business to create a template ERP and Business intelligence (BI) solution. This is affording the business opportunities to centralise operations. A recent acquisition will be onboarded to the standard group processes and reporting within three months of the transaction, releasing deal value early.
Private equity, strategic buyers and the public markets will attribute higher multiples for companies that are (or are perceived to be) on top of their technology strategy, which is why we are spending so much time with our private equity clients ensuring they have the right support around making these important decisions.
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