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For a good decade now most PE operating teams have gotten very savvy leveraging technology to enhance the investment thesis. Most started by predictive spend analytics to consolidate suppliers, improve contract performance and in general better understand drivers of drain on EBITDA.  Depending on the scope of the operating team, many got deeper into the same analytical rigor and predictive models for direct and indirect sales modeling, pricing strategies and even various correlations between capital and operating investments and sales performance. Then the more complex areas of the business came to the fore, designing more agile manufacturing processes and distribution networks.

The true innovation of private equity is not that they solve existing problems better. It is that they solve it much faster and with surgical precision. While large public companies would have hundreds of competing “programs” with five- or 10-year expected returns, PE projects are much fewer and definitely shorter horizon. That’s where technology helped.  It is a predictable and repeatable component of change in incremental process improvement. And Private Equity likes to repeat what works.

Something new is emerging at the best PE Operating shops. As private company valuations are at a sustained high level despite public market relief, digital technology is increasingly used as a key component of an updated business model. In the past, in investment theses technology was there to keep track of things or automate the mundane. The realization is there that the most valuable companies have a fundamentally different, digital process based business model from the lower valued peers. These trends have been very strong in China where cash flow based valuations assumptions could not justify exist value expectations, so they focused on public market valuation drivers especially in tech.

As digital disruption as an investment thesis component settles into the PE playbook we will see many more examples of such transformations as APAX Partners taking a traditional publisher and turning their business model into an ecommerce powerhouse (Autotrader UK).


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