Digitization is a largely untapped area that offers extraordinary opportunities for private equity firms but most investors aren’t fully aware of the potential and therefore aren’t yet asking the right questions, according to a new paper by Strategy&, PwC’s strategy consulting business.
According to the report Private equity and digitization: The hidden equity story, with the exception of technology focused funds, many private equity investors are neglecting digitization’s importance.
Private equity’s views of potential acquisitions will change based on their knowledge of the target’s digital capabilities, sometimes dramatically. In some cases, paying a premium is justified because the target company is digitally advanced while other companies lag so far behind digital leaders that they’re not worth buying regardless of the price.
However, companies that could be considered “digital laggards” in sectors with no clear leader, also have enormous opportunities. The report outlines some key strategies that private equity funds can use to maximize returns on both the portfolio and target side.
The report states that unless private equity firms embed due diligence on digitization inside their standard commercial due diligence, they increase the risk of missed opportunities and unexpected losses. In the acquisition phase, due diligence on digitization will look not only at target companies but also at their competitors. In the development phase, there are many ways digitization can create opportunity and prepare companies for a profitable exit.
“Digitization is an ongoing process and a proper base for digital development, combined with effective communication, can add an extra layer to the equity story. Would-be acquirers that understand the potential for further growth may be willing to pay more,” says Olaf Acker, co-author and partner with Strategy&, PwC’s strategy’s consulting business.
“With the right capabilities, a firm can use the lens of digitization to pick the right targets, avoid potential losses, maximize portfolio value and build a reputation in the markets for preparing companies for future success,” says Steve Roberts, a partner and leader of PwC’s private equity business practice.
To learn more, visit www.strategyand.pwc.com/reports/private-equity-digitization. A copy of the paper Private equity and digitization: The hidden equity story is available from the media contact.
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