Digital Transformation: Looking Inward
At Arcspring, we pride ourselves on game-changing digital transformation within our portfolio companies. Utilizing our expertise in software development, management efficiencies, and creative marketing - along with our network of industry professionals - we're able to create additional value in these companies by infusing them with ground-breaking technology.
The private equity world is - rightly - concerned about creating value for their companies, but they often neglect to transform and modernize their own business. However, we are at an inflection point - one where an abundance of technology can reshape the private equity landscape by providing incredible advances that streamline operations with intelligence, insight, and informed analytics. And those firms that don't seek out these technologies will soon see their ability to efficiently and effectively manage their funds wither on the vine.
In KPMG's "The Digital Transformation Imperative," they identify four ways in which digital transformation directly benefits private equity firms:
Finding, valuing, and pricing investments (predeal assessment)
Managing, optimizing, and/or merging portfolio companies (postdeal)
Exiting investments
Enhancing internal operations (tax reporting, regulatory compliance, investor communications)
All of these can be improved upon using things such as blockchain, AI, IoT, big data, and machine learning. Many firms are already adopting these technologies to improve their businesses. According to a study by Altvia, 39% of firms have already implemented technology to mitigate margin erosion. And in the time of COVID, many of these digital advancements are quickly becoming the backbone of private equity.
Predeal Assessment
Imagine not only having the past numbers of the company you're considering investing in but the highly-accurate forecast numbers as well. And all of them come from a push of a button, not analysts pouring over years of research. Utilizing AI and big data, we can accurately predict where a company is heading. Now, competitive analysis, global political movements, sales forecasts, even the weather can all be considered to present you with an idea of how ripe for investment a company is now and how valuable it will be in the next seven years. In Citco's "Outperformance at Scale," they showcase how these digital technologies are being used to build flexible processes, tools, and structures.
Postdeal
In Private Equity Wire's "Technology Innovations: In Focus 2020," they raise the question of AI taking a board seat. A strange and, perhaps, uncomfortable notion to be sure, but one that will surely be given consideration in the next decade. After all, once you have a complete picture of the portfolio company, after you've invested, and finally, have a full view of their operations, you can enable AI to manage everything from back-end logistics to real-time reporting to your LPs. Incidentally, Arcspring is developing our own proprietary playbook for value innovation called Springboard which utilizes all matter of data and AI to create digital pivots within portfolio companies. Targeting such spaces as digital marketplaces, products, and services, along with insight services, IoT, and direct-to-customer efficiencies, Springboard will become a giant leap forward for us in making informed board-level decisions about how, when, where, and why to create value in our portfolio companies.
Exiting Investments
Digital investment improves a portfolio company’s exit price: More than eight in ten (82%) respondents say they view mature digital investments at a portfolio company as a value driver at exit. Three-quarters (75%) say they also make digital investments in order to improve the exit price for a portfolio company without the expectation of performance gains before the sale.
-WestMonroe, "Digital at the Speed of Private Equity: How to Increase EBITDA Through Digital Investments in the Mid-Market"
Transforming analog businesses to digital enterprises is the heart of Arcspring's thesis. We recognize the significant opportunities that digital transformation provides - and despite the not entirely small initial capital investment - it becomes a highly effective way to create revenue and earnings growth while keeping an eye on that high pricing multiple at exit. While it still takes a well-informed group to strategically placing them within an organization, once they're set up and working, they'll surely add to a company's value.
Internal Operations
At Arcsrping, our doors, lights, and HVAC run on IoT. Our payroll, benefits, and on-boarding are handled by Zenefits. Our expenses go through Expensify and our internal communications are handled by Workplace. Along with the standard Google, Microsoft, and Adobe software suites, and some in-house software we're developing for reporting, we are able to operate a lean and fully-capable private equity firm. This trust and reliance on technology helps eliminate a tremendous amount of overhead, automates tedious work, and allows our team to concentrate on running a successful business.
The question about implementing a digital transformation in your private equity firm is not "when." "When" was a few years ago. Now, it's about "how" - and to make sure that the systems you've put in place accomplish two things: improve operational efficiencies and provide value for your portfolio companies.
