The technological evolution of private equity

Private equity and the technology perspective

One of the answers to the difficult market conditions in private equity are technology initiatives that can drive and stimulate sustainable growth. 

The digital transformation path is a way to achieve key strategic and financial goals faster. However, decisions to launch it are often postponed because of the common perception that digital transformation must be a major project consuming significant organizational resources and taking many months to complete, causing operational slowdowns and whose return on investment is very difficult to measure in a meaningful way. In reality, with proper planning, digital transformation can run effectively and smoothly while delivering tangible benefits, so it is not worth delaying.

Technology is no longer in the center of attention of just CIOs and IT teams, but is increasingly becoming one of the key areas of interest for individual business and finance divisions. This is borne out by the results of the PwC Pulse Survey: Focused on reinvention, which indicate that 59% of directors plan to invest in new technologies. Moreover, this survey also shows that CIOs are focusing on key corporate systems at the organization's value chains, which are the basis for creating new products and services and thus generating more revenue.

CIOs remain the focus of attention on:

Digital transformation is an opportunity for radical change in the short term, but for many companies it is very difficult to rationally assess the direction, scope and priority of change using technology.

At the same time, 88% of CIOs say they are willing to invest in new technologies. What's more, 46% of them are already considering investing in generative artificial intelligence, seeing it as an opportunity to significantly strengthen their organizations with new business capabilities.

How can deal profitability be improved from a technology perspective?

During the acquisition process of a target company, regardless of the sector, investors usually rely on conventional due diligence, focusing on commercial, financial and legal aspects, often overlooking the technological area. Although not always closely related to the business profile, IT is a key enabler and accelerator of growth, both at a strategic and operational level.

The beneficial role of IT today is irreplaceable and hardly any business process can function without the right technology supporting it. With modern technology solutions, businesses can increase their operational efficiency, improve internal and external communication and better understand and respond to customer needs. Innovative IT tools enable faster data-driven decision-making, which in turn leads to increased competitiveness in the market and rapid adaptation to evolving customer needs.

On the other hand, ignoring technological aspects can slow down margin improvements, the accelerators of which include business process automation and the ease with which an organization is able to scale. For example, an inefficient systems architecture or ineffective technology stack prevents the integration of sales and customer data, significantly limiting product and service functions.

Artificial intelligence continues to generate a lot of enthusiasm among investors, with projects based on machine learning and Large Language Models (LLMs) allowing companies to increase operational efficiency through process automation.

However, with any technology, key questions need to be answered to assess its impact and potential benefits to the company.

• Does the organization have the right resources and foundations to successfully implement AI and GenAI solutions?
• How will artificial intelligence affect portfolio companies?
• Which business models will change and what new opportunities will arise?
• How can criteria for future investments be adjusted?
• How can we implement generative AI to improve internal operations?

IT Due Diligence is a rapid analysis, lasting approximately 3-4 weeks, which provides critical information about the technology environment of the acquired company, identifies risks and gives recommendations for potential changes to the IT organization. The study focuses primarily on assessing the main technology risks affecting the transaction, helping investors avoid costly mistakes. Within the IT Due Diligence there are 5 main areas: 

By reviewing the IT strategy, infrastructure, architecture, budget and organizational structure, investors are provided with the knowledge to mitigate potential risks and ensure compliance with market standards. Identifying 'red flags' and 'deal-breakers ' in the technology domain allows investors to avoid costly mistakes, fostering investment caution. Furthermore, IT Due Diligence enables the opportunities for optimization, innovation and strategic enhancement within the target company's technology landscape to be exploited. 

Neglecting transactional risks can put a significant portion of the transaction value at risk and jeopardize the success of the investment. Failure to recognize critical issues, such as the impending replacement of an ERP system or scalability limitations of key systems, can hinder a company's ability to continue to grow.

The consequences can manifest themselves in the form of operational bottlenecks, reducing productivity and profitability. In addition, unforeseen challenges in the post-acquisition IT environment can lead to increased costs and disruptions, reducing the anticipated value of the deal. Overlooking these and many other risks poses significant risks to the realization of expected returns on investment.

Sources:
https://www.pwc.com/us/en/library/pulse-survey/business-reinvention.html
https://www.pwc.com/us/en/library/pulse-survey/business-reinvention/technology-leaders.html