Buyout firms embrace technology for investment and to boost their own performance

By Robin Pagnamenta – They are used to big deals, quick turnarounds – and bumper pay days. But private equity executives have, in the past, sometimes been slower to embrace something else: cutting edge technology which rules the roost in many other areas of the financial services industry.

Compared to asset managers and hedge funds, which rely on state-of-the-art software and artificial intelligence (AI) to execute trades and craft trading strategies every hour of the day, private equity has always moved at a different pace.

A highly conservative industry – deals often take years to come to fruition – and the importance of human relationships, raw intuition and longer time horizons in the sector, has traditionally meant that technology has taken more of a back seat.

No longer – at least that is the verdict of the industry experts interviewed by GFM in this year’s Private Equity Week annual technology report.

Over the past 12 months, private equity firms around the world have been engaged in an extraordinary boom as investors hunt for higher returns with interest rates at historic lows.

The global value of deals carried out by private equity firms is expected to exceed USD1 trillion (GBP723 billion) for the first time this year, according to figures from Bain & Co, the management consultancy firm.

But as the market grows fiercely competitive – with more deals and more funds than ever before – so the way firms deploy technology to analyse and conduct deals, supervise portfolio companies and communicate with investors, has taken on an increasingly central role.

Tech investments in focus

Perhaps this should come as no surprise.

After all, private equity firms are flush with cash and have been shovelling vast sums above all into technology companies as they chase higher returns and profitable exits.

Back in January 2021, global private equity dry powder stood at an all-time high of USD1.9 trillion despite the fact that fundraising had slowed in 2020 as investors pulled back from committing capital to new funds to focus on existing portfolio companies, according to data from Preqin.

Either way, a large chunk of that cash has been channelled into tech investments – about USD80 billion in the first quarter of 2021 alone, according to figures from Bloomberg.

That was an all-time quarterly record and 141 per cent higher than during the same period of 2020.

It included deals like the USD5.3 billion acquisition of Cloudera by a private equity consortium including KKR and Clayton, Dubilier & Rice (CDR) in June and Thoma Bravo’s purchase of security software vendor Proofpoint in April for USD12.3 billion

In February, Stone Point Capital and Insight Partners also agreed to buy tech-powered real estate company CorePoint for close to USD6 billion.

Ernst & Young said in a report earlier this year that technology accounted for 24 per cent of private equity deals by total value in 2020, up from 19 per cent in 2019.

Given their growing taste for technology investments – some of which have delivered sizzling returns in big ticket IPOs like Zoom, Snowflake and Asana – it follows that private equity firms should be seeking to embrace more new technology themselves to help streamline their operations and improve performance.

“The industry is moving towards more of a technology focus and innovation is going to rule the day,” says Jake Zornes, managing director of UMB Fund Services. 

“The market is becoming more and more competitive – that’s the general trend.”

LegalTech

From legal technology which is helping them to shave millions off their lawyers’ bills to cloud-based analytical tools and third-party data sources used to evaluate potential deals and communicate more effectively with investors, software and IT are playing a bigger role than ever.

Many firms are realising that the days of running a private equity fund with an Excel-spreadsheet database have long been consigned to the history books.

These days, funds which don’t apply new software and tools or automate previously manual processes are putting themselves at a distinct disadvantage compared to rivals which are able to use technology to process a far greater volume of deals, often with a smaller and nimbler team. 

“When you look at private equity firms that have done really well over the past five to seven years, they have a very aggressive sourcing strategy,” says Rich Itri of ECI. 

“They are really aggressively sourcing new companies, engaging with those companies, and making investments in them.”

Nicholas D’Adhemar, founder of London-based legaltech start-up Apperio, agrees that software is being viewed much more carefully by private equity firms than in the past.

He says: “Ultimately, you look for the return first, but then what’s the secondary differentiator? It’s going to be elements like this that point to how you run your shop.“

“They’re looking to technology to help them be more efficient and more effective, and how they run their internal teams – but also the deals themselves.”

Software in focus at PE portfolio companies

Of course, there is another leg to this story: the role that new technology plays in helping boost the profitability of private equity portfolio companies.

More than ever before, private equity firms view the deployment of new systems and software as the most obvious way to cut costs and drive efficiencies when they acquire a new business.

That laser focus has also driven many to look more carefully at their own operations. 

While human intuition and the ability to spot a good management team or a brilliant new entrepreneur with a great business idea will always play a vital role in the sector, there is little doubt that firms are viewing technology in a far more strategic way than ever before.

The relentless rise of cloud computing has amplified this trend, partly by dramatically improving access to third party data sets, which are helping private equity firms make better judgements about corporate valuations.

Itri says: “Third party data really gives them the opportunity to find bolt-ons or companies that they just didn’t have before – or it allows them to better value the company that they want to buy.” 

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