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Digital Transformation: The Hidden Alpha in Private Equity

PE houses have long played a key role in creating value for their portfolio companies through cost-cutting and revenue-growth strategies. However, in today's rapidly evolving digital landscape, digital transformation has emerged as a key driver of value creation and a hidden alpha for PEs. By identifying companies that have the potential for digital transformation, PEs can take advantage of new technologies, improved processes, and increased customer engagement to drive growth and maximise returns.

Digital transformation can offer a competitive advantage, allowing PE-backed firms to distinguish themselves in a competitive market and attain premium valuations. It can aid PEs in creating value for portfolio companies and delivering strong returns to investors through organic growth, M&A, and strategic partnerships. 

Digital Maturity Makes a Difference

Studies have shown that companies that undergo digital transformation often see an increase in value. A study by the MIT Initiative on the Digital Economy found that companies that excel in digital intensity and transformation management are more profitable by 26%, earn 9% more revenue from their physical assets, and have a 12% higher market value compared to other large firms in their industries. 

In a study conducted by McKinsey&Company, many executives believe that digitisation can reduce economic friction and drive competition, resulting in pressure on revenue and profit growth for businesses which has not adopted the transformation. This means that with current levels of digitisation, businesses might lose 6% of annual growth and 4.5% of EBIT if they fall behind the digital penetration in their industries

Another research published in Harvard Business Review demonstrated that incumbent firms that do not embrace digital innovations may experience a loss of up to half their revenue growth and one-third of their EBIT growth. 

A 2020 study by Deloitte confirmed the correlation between digital maturity and financial performance, revealing that factors like enhanced product quality and customer satisfaction, resulting from digitisation, positively impact a company's financial performance.

Generating Reliable Alpha for PE via Digital Transformation

Private equity firms are always on the lookout for ways to generate alpha for their investors, and digital transformation provides a compelling opportunity to do just that. By leveraging the latest digital technologies, private equity-backed companies can streamline their operations, enhance customer experiences, and open up new revenue streams. All of these outcomes can drive growth and increase the value of the company, leading to higher returns for the private equity firm and its investors.

To take advantage of the opportunity that digital transformation presents, private equity firms need to be proactive and strategic in their approach. This starts with

  • identifying the right portfolio companies to focus on 

  • developing a clear and comprehensive transformation plan that leverages the latest digital technologies.

  • seek out the best strategic partnerships with digital transformation service providers to help lead the transformation and create the right culture to foster digital innovation and experimentation. 

By taking a systematic and strategic approach to digital transformation, private equity firms can create a reliable source of alpha for their portfolio companies and deliver exceptional returns for their investors.

Webinar: Increase portfolio value with Digital Transformation that cannot fail

Gone are the days when Digital Transformation would increase the value of a business! We are in the era of survival of the fittest, the Digital Evolution era.

One of the biggest risks to PE houses' portfolio value is if they fail to digitally transform their businesses, they will be at risk of extinction.

So what the PE houses can do to enable their portfolio in this journey? How can they enable their portfolio CEOs to prevent failure and ensure successful digital transformation?

Watch the webinar Increase portfolio value with Digital Transformation that cannot fail as we introduce DiGence, the award-winning digital transformation framework that lets you know where to invest in your digital transformation in days, not months.