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Private equity and digitization

The hidden equity story

Executive summary

For private equity funds, the days of buying stakes in companies at a low price and selling high are over. Prices are high across markets, competition is fierce, and opportunities for multiple arbitrage are scarce. More than ever, private equity managers need special insights to find value where others can’t. They also need the skills to take a fairly priced asset, implement hands-on management, and create value that will boost their returns.

There is still a largely untapped area that offers extraordinary opportunities for value creation, but most private equity firms — in fact, most investors — aren’t fully aware of the potential here and therefore aren’t yet asking the right questions: To what extent has the target company digitized its services and products, operations, and back office? How does the level of digitization compare with that of its competitors? How much more can be done, and what’s the best way to do it? These are some of the questions that should be a big part of any private equity investor’s due diligence. But except for technology - focused funds, many private equity investors are neglecting digitization’s importance and may need additional expertise in recognizing and developing a strong digitization strategy.

Digitization has by now made its way into nearly all industries. It isn’t just about tech companies, or sales channels, or a little more cost savings on the margins; it’s also about creating new products and services, new production methods, and new ways of collaborating with customers and suppliers. It’s about the revolution of the industrial sector under the banner known as Industry 4.0, and beyond; though few people associate such sectors as natural resources and chemicals with the latest technologies, digitization can change every sector of the economy — and it is. All of a company’s physical assets and all of its partners along the value chain can become part of an ecosystem in which data moves seamlessly throughout. In a fully digitized company, production and supply chains will be lean and flexible. Marketing will be omnichannel and responsive to customer needs. The company’s internal structures will be efficient and integrated. Product and service offerings will be digitized and expanded. The company will have, in sum, much greater potential for growth and profitability.

Understanding this big picture is just one piece of the puzzle. Private equity managers also need to be able to assess precisely where individual target companies and their competitors stand in this ongoing movement. They also must have the ability to provide hands-on management when needed so that they can help their portfolio companies develop comprehensive digital strategies and build necessary capabilities.

When private equity firms have this knowledge and this ability, their view of potential acquisitions will change, sometimes dramatically. In some cases, paying a premium is justified because the target company is digitally advanced. Other companies lag so far behind digital leaders that they’re not worth buying regardless of the price.

Still other companies, digital laggards in sectors with no clear leader, have enormous value that can be unlocked. For that, private equity managers must have the capabilities to guide a digital strategy and the implementation of new technologies. With some companies, these technologies can do far more to improve performance than traditional cost-cutting methods can.

In this report we provide an overview of how a private equity manager should start assessing a company’s digital capabilities. The investment due diligence process should include a “due diligence on digitization” component; to that end we’ve formulated a (by no means exhaustive) series of important questions that private equity investors should ask, along with a look at how companies typically evolve into digital maturity, a briefing on core digital capabilities that a company should have, and strategies that private equity funds can use to maximize returns.


In the current investment market, it’s more important than ever for private equity firms to choose target companies wisely and to develop them to their full potential. But unless 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, the concepts outlined above give an idea of the many ways digitization can create value and prepare companies for a profitable exit. And digitization is an ongoing process. 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 a higher multiple.

Experience and specialized skills are needed to take advantage of digitization’s potential in both the acquisition and development phases. Private equity firms that don’t have these skills may have to invest to build out their own digital capabilities, or align with strategic partners that know how to assess target companies, support digital transformations, and capture the potential value.

With the right capabilities, a firm can use the lens of digitization to pick the right targets, avoid potential losses, maximize its portfolio’s value, and build a reputation in the markets for preparing companies for future success.