Private Equity
Sustainable value creation for portfolio companies through digital transformation
Why is digital transformation critical for private equity firms?
For private equity firms, implementing a sustainable digital transformation strategy is highly important as it enables data-driven due diligence, increases operational efficiency, and accelerates revenue growth for portfolio companies. However, the challenge many PE firms face is attracting and retaining skilled digital talent to execute digital transformation.
PWC sees digitalization as a critical megatrend at the top of private equity firms’ agendas. However, in Price Waterhouse’s view, many PE firms are still lagging behind in transformations that would deliver real benefits.
Digital transformation is probably to private equity firms what financial leverage is to hedge funds – a competitive advantage in portfolio selection and investing in middle-market companies. Moreover, operational transformation without digitization is unlikely to be a growth accelerator these days.
A number of leading companies have themselves built talent and capabilities to support the digital paradigm shift. For example, Blackstone has built a data analytics team focused on data science, big unstructured data and predictive analytics. The team works with firms’ investment professionals to improve the investment process, make new investments, and optimize the operations of existing portfolio companies.
But building in-house resources is costly and cumbersome. Especially if they are only to be used selectively, for example in the operational transformation of a portfolio company – and there only for a certain time frame.
TENSTAGE offers consulting services for the design of a digital “acceleration process” and has the skills to implement a digital roadmap. In this way, alpha can be generated within the shortest possible time.
What does digital transformation mean for portfolio companies?
Digital transformation continues to have a variety of definitions and many different meanings. Digital transformation is ultimately an operational optimization with a focus on digital elements in order to achieve a fundamental acceleration of the portfolio company.
This can involve optimizing internal process flows, but also improving products or enhancing channels and customer interfaces and making them more attractive.
From our experience, the following goals are particularly important for investors when portfolio companies are to be operationally optimized:
Scalable platform
Building an open infrastructure and a cloud-first approach to replace the existing stack and a modern API strategy. The focus here should be on performance and future viability.
Distinct data strategy
Data-based KPIs to steer the company, governance, tools, if possible/necessary artificial intelligence (AI) but definitely analytics capabilities. The objective is to use internal and external as well as structured and unstructured data and to create usable added value from it.
Customer experience
Customer needs and expectations must be placed at the center of digital transformation. This is the only way to achieve seamless and smooth user interaction across all channels. The expectation today is that regardless of the products or services offered, the customer will experience the same, positive experience at every touchpoint.
Scalable partnership and innovation ecosystem
In order to serve the customer as end-to-end as possible and to be able to continuously submit relevant offers to him, the capabilities of partners, fintechs and/or startups are necessary. The objective is a marketplace where gaps in the own offering are supplemented by partners without the customer having to leave the own platform.
Building and retaining digital skills and talent
In order to sustainably shape the digital transformation, talent must be found and promoted. Retraining opportunities for existing employees and the right recruiting strategy for external talent are key to this.
How does TENSTAGE work with private equity firms?
TENSTAGE supports private equity firms, family offices and investors in identifying digital potential as part of strategic due diligence. In the course of an operational transformation, TENSTAGE helps to realize digital value creation through sustainable operational improvement as the main driver of enterprise value growth (focus on revenue and margins). Finally, in the exit process, we offer our clients support in creating a digital storyline and, if desired, with our network.
Strategic due diligence
Market analyses (size, segments, trends) and identification of digital (growth) potentials
Success factors from the customer’s perspective and digital optimization levers
Opportunities and risks of digital business models in the competitive environment
Rough quantification of potentials and costs for the digital roadmap
Continuous value growth
Increase in sales through the creation/expansion of web/mobile applications and channels to tap into/exploit new customer groups
Improved margins through optimization of operational efficiency (focus on employees)
Increase in customer loyalty by optimizing the digital customer experience (UI/UX design)
Exit support
Outline of digital storyline (“next growth level”) for different exit options (trade sale, secondary, IPO)
Identification of potential digital buyers (fit to growth strategy)
Leverage of the TENSTAGE network of potential digital investors