Creating efficiency within private equity has become a major initiative in recent years as investors have been stuck using legacy programs that make already cumbersome tasks even more cumbersome.
Firm’s have realized, too, that their outdated processes have become somewhat of a burden as LPs have been steadily increasing their need for sophisticated analysis and reporting.
Simply, the old method of using Excel to store and track data is no longer sufficient for this new standard of business.
But beyond just meeting this new standard, implementing technology into your daily operations is becoming crucial in remaining competitive as an investor.
In fact, an IHS Markit report shows that 90% of the 30 senior executives from US private equity firms surveyed agree that increased competition for assets is driving their firms to reassess their use of data and technology.
Implementing technology in every stage of the deal lifecycle can create a cascading effect of benefits within a firm. In order to achieve this, though, it’s important to choose the right set of tools for each phase.
Sourcing Potential Deals
The foundation of any successful deal is its effective origination. That’s why investors need to be proactive in their deal sourcing.
Traditionally, though, the deal origination process is lengthy as it requires rigorous research and analysis on private market companies. Interns and junior investors are often tasked with curating company profiles, but even after hours of work, the reports still risk being incomplete.
Industry professionals recognized this pain point and developed tools that could optimize this process. This is where deal sourcing technology comes in.
Deal sourcing technology, at its most basic level, curates data and information on private market companies for on-demand access. Many platforms provide you with company financials, ownership information, and deal histories, among other data points, so you can gain an understanding of companies within minutes. Some of the top tools will even flag potential investment opportunities as new companies fall within your sweet spot criteria.
Without leaving the platform, you can develop a view on entire industries and benchmark companies against industry standards, making these tools comprehensive resources for your deal origination process.
The value of these tools lies in the quality of their data and what the tools allow you to do with that data. If used correctly, these platforms can save investors hours of time.
Building Relationships with Entrepreneurs and Management Teams
Half of the battle in executing a deal is creating strong relationships with the management teams and entrepreneurs of your portfolio companies.
Entrepreneurs could be apprehensive when first engaging in conversation with investors since they could be emotionally invested in their company. Because of this, investors must form strong relationships with the entrepreneurs so they have full trust in your team.
But executing a deal is a lengthy process, which means keeping track of relationships and communication can get complicated. And the price for mishandling relationships can be costly.
That’s why many firms are turning towards technology. Customer relationship management (CRM) systems can be used to streamline all forms of communication with clients. Information is consolidated on one platform, so team members can easily collaborate on ongoing deals.
If you integrate your deal sourcing software into your CRM, you can also view all data and information directly on the platform. This enhances your capability to track and manage your deal pipelines within your CRM.
Overall, CRMs designed specifically for the financial sector can refine a PE firm’s organizational processes and create efficiency within the team.
Performing Due Diligence
Due diligence is a rigorous, but necessary, process in any deal execution. Even though it requires thorough scrutiny, this process needs to be done as quickly as possible to remain ahead of your peers.
PE firms will often engage third parties, such as lawyers and consultants, in the due diligence process, but it’s important to leverage all the resources available to you.
Implementing technology in this stage of the deal lifecycle can make the process even more thorough while also saving you a significant amount of time. Data and information platforms are designed to provide firms with on-demand assets that aid in research and information gathering. Some companies offer a library of information that includes assets like interviews and articles which saves interns and junior investors from embarking on their own field work, instead allowing them to access information at the click of a button.
Other companies coin themselves ‘research-as-a-service’ (RAAS) businesses, providing users with industry professionals who will do this work on your behalf. This allows you to make the most out of the due diligence process.
Managing your Portfolio Companies
Once the deal is signed, the real work begins in maximizing the returns on your investment. Part of the work done in this 5-7 year holding period is collaborating with the management teams and entrepreneurs to increase business performance. The other part of the work is analyzing and reporting these figures to LPs.
In the past, most reporting and data analysis was done over Excel – an already cumbersome task. Nowadays, Excel is nowhere near sufficient to create the sophisticated reports LPs now require.
Recognizing this, industry professionals developed reporting and analysis tools to organize data and make it visible for all professionals involved. These tools track and organize fund performance, portfolio management, and performance attributions in one place, simplifying what is often a complex process.
Cap table tools can be used to organize data and information, as well as create standardized reports that can be shared with management teams, allowing for transparency and insight into company performance.
Reporting and analysis during a portfolio company’s holding period does not have to be a laborious process now with digital solutions. Not only do these tools make reporting more straightforward, they benefit the management teams and LPs that require such transparency.
Finding the Ideal Tech Stack
As technology is becoming more and more prevalent within the private equity sector, it’s clear that a well-curated tech stack is critical in creating a competitive edge against your peers. When using them right, digital tools not only take the cumbersome work out of your hands, they save you time in all phases of the investment process. This time saved can then be reallocated to other tasks that add significant value to the firm.
Finding the ideal tech stack for your firm doesn’t just happen overnight. It requires research. You first need to recognize your current pain points, then review the digital tools that offer the best solutions.
For a deeper understanding of the technology that can create efficiency in private equity, download our eGuide. We unfold the leading tech tools in the industry and give you tips on how to use them to make you a top performing PE firm.