A private equity digitization horror story – and how to engineer a happy ending

Digital transformation holds tremendous potential for modern private market managers – but evolving into digital maturity takes careful thought to fundamentally realign business models based on disruptive technologies.

Business leaders in the private equity space who succeed in owning and embracing digital transformation will be able to distinguish themselves from the competition. But there are good and bad ways of going about it.

Drawing on my experiences from my previous life as an LP, I can safely say I’ve seen it all – the good, the bad and the ugly. Here’s a sample scenario that many successful, thriving PE and VC firm leaders will recognize – a cautionary tale about what can happen when not enough thought is put into software selection.

Digital transformation: a private equity firm’s horror story

Imagine you’re the new CFO at a successful PE firm, and you’ve just closed your third fund. Your team has leapt into action finding deals, calling capital and setting up a reporting and bookkeeping system using the rudimentary tools they have at their disposal.

This patchwork approach, incorporating Excel, Powerpoint, PDFs emailed to and from and instant messaging communications, works for a while but as time goes by, the number of investments and the complexity of operations grows, departments expand, investment structures get more convoluted and different investor allocations come into play. It doesn’t take long for major operational inefficiencies to reveal themselves leading to frustration from both the operations team and LPs, dissatisfied at the piecemeal way workflow is being handled.

The LPs suggest outsourcing operations to a third-party fund administrator. Everyone agrees that this is a good idea to increase efficiency and reduce operational burden on the finance team. A fund administrator is duly recruited.

In addition, the partners decide that a modern IT solution should be implemented to make operations more efficient and due diligence compliant. Cue another new recruit – an IT manager to handle procurement.

The IT Manager meticulously works out the end-to-end workflow from front to middle and back office and prepares a process map of the firm’s operational lifecycle to analyze requirements and begin the software procurement process.

An office automation / ERP system with workflow/process management is procured. The team adopts the system. Unfortunately, it soon becomes evident that more specialized systems are needed by different departments:

  • The deal team acquires a pipeline management system to track prospect deals
  • The portfolio team invests in a portfolio management system to track investee company performance
  • Finance introduces an accounting system for general bookkeeping
  • IT settles on an LP CRM and virtual data room

The addition of these multiple systems results in the creation of numerous operational silos. Now, the company has numerous data management problems:

  • None of the data is linked – so it still has to be manually transferred from one department to another via offline manual upload. Not only is this low-value, time-consuming work but it multiplies the opportunities for potential errors
  • Sub-par user configurability – the system and data flow is not agile enough to quickly adapt to changing business requirements, for example, if IR want to track new portfolio information
  • Fund administration data still sits separately, and in the form of individual fund-by-fund silos
  • No integrated output can be generated from these systems

These flaws mean that sooner or later teams will default back to Excel while the system sits as data storage and is eventually abandoned altogether.

What seemed to be a well-planned procurement process has evolved into a nightmare.

What went wrong?

While each individual problem was solved as and when it arose, a lack of joined-up thinking led to a disconnect between the solutions implemented at different stages of the process.

In fact, the PE firm came full circle, spending an enormous amount of time and money on replacing one set of disparate and inefficient tools and systems with another, without solving any of the core issues. In the meantime, the company missed out on growth opportunities and user confidence plunged.

Unfortunately, the scenario outlined above is far from unique in the PE space. The ironic truth about our industry is that while the objective of PE firms is to help investee companies transform their businesses by improving operational efficiency, they have all too often neglected to effect transformation within their own operations. There are still many PE firms which have been operating for over a decade relying largely on Excel to manage their data! This needs to change.

How to get digital transformation right

There is a better way to deal with the long-standing inefficiencies of the PE industry’s infrastructure. The first step is to work out exactly where the existing problems lie.

I have identified four key problems which PE business leaders looking to digitize their operations need to avoid.

Four common pitfalls to avoid when navigating digital transformation

1. Viewing IT as a single project to be completed

Digital transformation is not something that can be addressed once and crossed off a to do list. It needs continuous ongoing improvement and upgrading in response to constantly evolving needs. Infrastructure needs to be built with scalability in mind in order to stay fit for purpose in a fast-changing industry (and world). Systems created in-house and fully customized solutions from third party vendors frequently come unstuck because of their inflexibility. They are built to solve immediate problems but lack the capacity to evolve.

2. Believing that outsourcing is a panacea for all problems

PE firms have leveraged third party outsourcing services to manage their fund administration, bookkeeping and portfolio monitoring. While the service providers take care of the day-to-day heavy lifting, the purely outsourced model is error-prone, often relying on manual data transfer with information stored in offline Excel records.

Given that data is the most critical and valuable asset for PE operations, it is infinitely preferable for PE firms to take full ownership of their data. This can be achieved using software solutions that complement your existing workflows, seamlessly integrating to connect and centralize information from third party sources in different formats to facilitate better internal data control, integration, consumption and insights.

3. Considering typical ERP systems as the one and only solution

ERP systems bring enormous advantages to businesses. They facilitate day-to-day business such as process approval, compliance and risk management and enable companies to control processes. What they do not do, is address the problems of data flow and data analytics which PE investment managers needing business and data insights must solve. For these companies, ERP systems and modern PE-specialized solutions should run in parallel, each carrying out a separate and important function of the business.

4. Automating too fast

Often companies have a lightbulb moment on the need for automation which triggers a rush to automate everything in as short a timeframe as possible. This leads to problems. A better approach is to prioritize automating the critical tasks which will have the most impact. Best practice workflows and processes can be established by getting relevant users committed to using them and remaining agile so that effectiveness can be assessed, and the feedback loop tightened.

Four tips for successful digital transformation

Getting digital transformation right will enable private equity firms to meet the increasing pressure from investors to deliver solid returns, real-time information, greater transparency and improved data granularity for flexible analysis and great insights. Indeed, as the digital revolution progresses PE firms will increasingly be judged by their digital technologies and those using outdated legacy software will be shunned in favor of firms offering better-designed, more intuitive and benefit-oriented platforms.

Here are my four top tips for firms looking to win the digitization game.

1. Understand that technology decision are business decisions

In the brave new digital world, technology decisions are business decisions. Data ownership is crucial. Careful thought needs to be put into determining key data, how it is stored (internally or outsourced to a fund administrator) and how it flows both internally, between systems and departments, and externally to LPs.

2. Build a technology roadmap

Devise a strategic plan that maps a path from the current technological state to the future state. This means prioritizing critical goals and demonstrating shorter term implementation results to build momentum.

3. Select the right partners

These are the main questions to ask to help you find the right partner:

  • Does the IT Partner have in-depth knowledge of private equity operations to provide a tailored solution?
  • Do they have successful track record with similar funds in the region?
  • What level of data granularity do they offer?
  • Does the system have flexible configuration capabilities to adapt to changing needs?
  • Does it carry out regular ongoing updates?
  • Does the system have a modern API platform that can seamlessly integrate with current and future systems?

4. Commit to continuous improvement

Without continuous improvement, software and systems decay and eventually become obsolete. Your IT solutions need to be a living part of your organization which evolve along with your business. This is a never-ending task, and PE firms have no exceptions. Assessment, improvement and investment are an ongoing challenge requiring regular and consistent review.

Digitizing is crucial for the future success of all PE firms. However, embarking on the road to digital transformation requires strategic thinking and commitment from senior leaders. Private equity and venture managers should welcome this endeavor as an opportunity to set themselves up for success and differentiate their companies as modern asset management organizations. Leadership teams with long-term vision should take bold steps and start preparing for the future now.

_____________________________________________________

by Jessie Juan
Co-Founder & Partner – Quantium
E-mail: jessie.juan@quantium.pe

1400 788 Quantium Technology

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