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Five portfolio management tips from venture capital veterans

Venture capital is often referred to as an apprenticeship business because so much important learning comes from day-to-day experiences. Yet, as an article published by the Business Development Bank of Canada (BDC) explains, you can shortcut the learning process by learning from experts: “Your learning curve can be shorter—and your results better—if you learn from pros who’ve already mastered key … ... read more

Private Equity

3 Ways Private Equity Firms Use Technology as a Competitive Advantage

By Rebecca Hinds & Caroline Schwanzer

Every company, in every industry, is in the throes of a technological and digital revolution. Private equity is no exception. Private equity firms now have access to unprecedented volumes of data that can inform —or derail— their investment decisions. The private equity leaders of tomorrow will be those who leverage technology and data to inform all of their decisions. Here are three ways in which private equity firms can thrive in today’s ever-evolving techno-centric marketplace.

  1. Prioritize Digital Know-How
    Digitization has become an undeniable source of competitive advantage for leading private equity firms. Private equity investors must not only be digitally literate to survive and thrive in today’s era, but they must have the foresight to implement robotic process automation (RPA), artificial intelligence (AI) and the internet of things (IoT) across their portfolio companies. David Bonderman, founding partner of private equity behemoth TPGexplains, “Everybody has to pay attention to the digital revolution…It’s like investing in electric cars or anything else. You have to be digitally literate to understand the business.”

    A recent report by Ernst & Young emphasizes the importance that private equity firms avoid a “Kodak moment”— a reference to the time when Kodak lost market relevance due to its inability to adapt to new technologies. It’s easy for private equity companies to subscribe to a “good enough” or "it's worked in the past" mentality. But the highest performing firms challenge the status quo and continually keep abreast of changes in technology. They embrace the latest artificial intelligence, machine learning, and internet of things technologies and monitor not only how these technologies affect their own firm, but also how they affect their portfolio companies. 
  2. Hire A Chief Digital Officer
    In addition to doubling down on general digital know-how, private equity firms are recognizing the need for—and value of—a dedicated role to oversee digital strategy and growth. EY’s report also highlighted the need for a Chief Digital Officer (CDO). The report explains, “[f]illing [a CDO role] will be essential for PE firms as they look to reinvent their portfolio companies for the digital age.”

    Most private equity CDOs will likely assume a multi-faceted roles and responsibilities. They will be tasked with overseeing the ways in which technology is disrupting the supply chain and their portfolio companies, assess their cybersecurity strategy, and evaluate investments in data-driven technologies to inform investment decision.
  3. Embrace Data-Driven Technologies
    Traditionally, private equity investment decisions were based, in large part, on balance sheets and profit and loss statements, oftentimes created and managed in Excel. Not only is this data not updated in real-time, but it is also is limited in scope. New technologies, including artificial intelligence, and machine learning-driven approaches, promise to disrupt the status quo and more effectively analyze past and future performance.

    Consider San Francisco-based Two Six Capital. The company has developed a data science platform that helps private equity firms assess past company performance and predict key business drivers. Two Six Capital has already analyzed $116+ billion in transaction level revenue data. Armed with Two Six Capital's assessment, private equity companies are able to make more data-driven investment decisions.

    Private equity companies should also look to intelligent customer relationship management platforms. Using platforms such as Affinity, private equity companies are able to strategically determine the best paths of introductions to prospective portfolio companies, thereby using real-data to capitalize on private equity’s number one imperative — forging strong relationships.
The Technology-Driven Future of Private Equity

The private equity industry has undergone a remarkable transformation in recent years. The next era of private equity will inevitably be redefined by technology. 46% of private equity investors believe access to meaningful data is their biggest challenge during an acquisition. Further, 44% say a lack of reliable information is the most significant factor that will cause a private equity firm to reduce its offer — or walk away from a deal entirely. Data-driven firms will not only remain at the forefront of innovation, but will likely be the only private equity firms to weather the storm of digitization. 

Private Equity