2017 was another watershed year in Private Equity. Almost all the buyout fund capital growth happened in megafunds ($5B and above) and valuations continued to rise to record heights (15 times EBITDA). There ismore capital available than attractive targets at those valuations. At the same time strategic buyers got more active and also introduced record level buying in corporate venture funds. All of this reinforced the trend that operational value creation continues to be essential not only for growing enterprise value but also winning the deals in the first place. Investment theses get more aggressive in their assumptions for not only operational improvements but also fundamental business model changes especially through digital.
Several of these trends impacted how we at SAP support the firms. Some of the trends impacting technology providers for PE value creation are;
- More sophisticated analytics and modeling especially in sales and spend analytics, even early adoption of AI and machine learning in investment theses
- PE focuses even more on top management talent even more especially in finance and sales. Whatever technology can enable star executives will be critical for growth
- Several firms adopting Digital First to drive business model change first and operational changes later (especially in retail, technology, consumer and manufacturing)
- Carveouts and add-ons continue to grow and require more technology integration and simplification than traditional buyouts
- The number of PE firms doubled since 2010 to above to 8,000 and the pressure to differentiate with technology increases
- Over 50% of companies are held for over 5 years which allows time for technology transformation
- Majority of exits are now to strategic buyers who value technology and process more
- Some firms (Blackstone, Carlyle) launched 10+ year funds and allow more time for transformation
The above trends coupled with the increasing ownership of the economy by private equity may bring in a golden age of digital transformation in PE.