Managing Director & Partner
Related Expertise:Principal Investors & Private Equity
Given the imperative for value creation in today’s private equity marketplace, no PE firm can afford to neglect deploying digitization in its portfolio companies. This is especially true since—as BCG’s research and analysis have found—PE-owned companies, on the whole, tend to lag behind their non-PE-owned peers in digital maturity, possessing fewer digital strengths and less-developed digital capabilities and efforts.
Yet the fact that PE-owned companies are generally not found in the ranks of digital champions—that is, best-in-class digital leaders--—comes with some good news: PE firms have the opportunity to unlock a great deal of unrealized value in their portfolio companies by joining those ranks.
A study BCG conducted last year showed that digital champions outperformed peers across several dimensions:
Using a survey with more than 100 data points, BCG has conducted outside-in assessments of the digital maturity of PE portfolio companies. Using 8 key criteria from BCG’s Digital Acceleration Index (DAI), BCG’s analysis then compared the results with the averages from their respective industries.
In rating PE-owned companies against their non-PE-owned peers, the assessment criteria were:
BCG has identified several PE-owned companies—in the consumer fashion industry, for example—that have achieved new digital growth by using omnichannel capabilities to address customer needs. But BCG’s findings in its assessment suggest that, on the whole, PE portfolio companies lag behind their industry averages on all 8 DAI criteria.
The assessments also revealed that:
Another key finding is that PE-owned firms that lag farthest behind in vision—that is, that score lowest for having a business strategy driven by digital—are also laggards along every other criterion from the DAI.
Responding to the following three imperatives helps PE firms maximize the return from their investments in digital and boost revenue growth, improve profitability, and increase multiples at their portfolio companies.
Before identifying which digital value levers you want to pull, clarify the role of digital in your company’s overall value-creation and equity story.
Such clarification must include a thorough assessment of industry-specific digital trends, including the risk of digital disruption your company is facing. It should also identify your digital opportunities as well as the starting point of the portfolio company.
At BCG, we typically see two primary vectors of digital value-creation as part of the equity story: increasing a company’s efficiency through digitizing core processes, and finding new growth by building new businesses.
After devising the overall value-creation plan, you must choose which digital levers to pull, and in what sequence, by using three criteria:
Quick wins, such as those achieved from digitizing back-office support functions and getting bottom-line increases, will be achievable within 6 months. But it will likely take 2 to 3 years before business-building digital initiatives yield measurable top-line growth and other positive outcomes.
Consequently, it is imperative that your deal team find the right mixture of digital initiatives—both short-term and long-term—as part of your portfolio company’s overall value creation agenda.
To define value-creation plans that will maximize returns and offer the most effective governance support to portfolio companies, PE firms must also be clear about the role that digital will play in their own operating models. This role can typically be understood by asking three questions:
When planning for the implementation period, it is important to note that the digital transformation of processes and entire businesses takes time. While some results can be realized quickly, a full digital transformation may take several years, depending on the company’s starting point.
However the always-changing digital landscape takes shape down the road, PE firms can be sure that digital tools and technology will remain essential to competitive advantage and to optimizing top-and bottom-line performance for the companies in which they invest.
Meanwhile, the untapped value in today’s PE-owned firms presents opportunities right now for PE investors to create significant value for their portfolio companies, their own investors, and themselves. BCG’s tools for digital value creation can help PE firms start taking advantage of these opportunities immediately.