How Private Equity Can Drive Innovation For Business

The private equity industry is no stranger to the growing demand for digital transformation. In order to best leverage their investments, private equity firms should make strategic improvements to the companies they invest in. Of all the possible organizational and operational changes, digitalization has risen to the forefront of the private equity industry as a recognized asset. Personally, I have had the opportunity to participate on both sides: as an advisor to private equity firms taking on investments that required significant transformation efforts, and as a vendor participating in and leading this effort.

A 2019 report released by West Monroe found that 80% of private equity respondents “view mature digital investments at a portfolio company as a value driver at exit.” A 2019 PwC report indicated that 75% of private equity firms surveyed planned to invest in digitization over the next year. Because of private equity’s strong economic influence, these digital investments can drive innovation forward at many otherwise struggling or undervalued companies.

In private equity, success and profits are generally determined by the ability to gain exponential value when it comes time to sell — typically within three to five years after purchase. For many industries, such as IT, B2B and healthcare, innovation can be especially important for securing ROI. In addition to the product, the firm may look at improving the digital footprint, brand, performance and customer experience — all of which tie back to the benefits of digital transformation.

As private equity firms assess and implement strategies to eventually sell the companies they purchase for profit, digital transformation can become a competitive advantage and one of the most promising ways to ensure return on investment. While private equity investors are savvy at identifying companies with potential for future profits, actually implementing digital transformation often requires skilled development teams who are able to help investors meet their goals.

When private equity firms are able to help clients deliver software solutions, they may be able to generate more value faster. However, private equity-funded software projects are often ambitious and require replatforming or complex application integrations.

Further, digital transformation is not a simple or straightforward project that can be completed and left alone. It is an ongoing process due to a constantly changing digital landscape, and it is heavily influenced by the need to continually improve the customer experience. A private equity firm that wants to prioritize innovation and digitalization should understand how its portfolio companies can meet their customers where they are at. It should consider every aspect of the digital footprint with the customer in mind, including its website, digital marketing and software platforms.

This is where software development partners often step in to help meet the demands of a major digital overhaul. (Full disclosure: My company offers these services, but others do as well.) Private equity firms should look to partner with companies that specialize in digital transformation and that can make the transformation happen fast and effectively. The right strategic partnership can help portfolio clients with everything from performance to efficiency, delivery and more. Choosing a company that utilizes Agile software development is especially important because quick, iterative and collaborative software release cycles can be key to maintaining progress and meeting the demands of the investors’ goals and timeline. Companies that utilize Agile development and leverage distributed teams can ensure continuous development and support in order to complete software projects on time with a high quality of work.

One thing in particular private equity investors should look at when selecting the right company to partner with is how much product development experience a company has. They should also consider whether they need a strong product engineering culture or a more project-oriented company. Product development typically requires longer and larger life cycles, support and maintenance than projects do. A company that has a product engineering culture usually brings more steadfast approaches to architecture, scalability, automation and so on. So the questions private equity firms want to ask their prospective partners are:

• How many products they have built — for their clients and/or for themselves?

• Do they have experience in launching and supporting open-source projects?

• How would they structure the team for major replatforming efforts?

Getting clear answers to these and similar questions can help to identify the best companies for their needs.

The investments private equity firms make play a key role in helping companies innovate and digitize. These firms should look to make these continuous adjustments to their digital investments to ensure that they are able to deliver the most possible value. If more private equity firms prioritize digital transformation, they can drive innovation across industries. There is also a growing opportunity for software companies that offer digital transformation and distributed software development services to partner with private equity firms to help their clients succeed and prepare for the future.