Digitalisation in private equity: challenge and opportunity for the private equity houses and their portfolio companies

The Asset and Wealth Management industry continues to be under fee and margin pressure. It also continues to be poised for further consolidation and transformation in order to meet stakeholder demands. At the same time, we expect this industry to grow, globally reaching Asset under Management of US$ 139.1 trillion, in our base case estimate, by 2025 (up from US$ 110.9 trillion in 2019). With the alternative asset class (namely private markets) representing one of the fastest growing asset classes (second only to ETFs). And with record levels of dry powder, the private equity industry in particular has never been better positioned to fund the future. However, as always, there will be winners and there will be losers.

In many ways, the storm of 2020 brought on challenges to asset managers, but it also accelerated certain positive trends, propelling the industry into a wave of accelerated transformation. One characteristic of companies that were able to successfully ride the storm of 2020 is digitisation. Also, beyond self-reconfiguration, private equity houses recognise that investments into their portfolio companies’ digital foundations is what will set these businesses apart from the competition and will be fundamental for value creation (PwC Private Equity Trend Report 2021).

The problems of predominantly manual processes for structuring data

We see in the market that digital transformation is applied to all activities within private equity houses: from front to back office, as well as the corporate functions. Readily available data and the format and speed with which it flows is among the main challenges. Deals are reflected in, usually, bi-lateral contracts, and the portfolio companies typically don’t share access to their systems with the private equity firm. And if the firm does receive the resulting data, the transfer is done manually upon request, at a much later date, and can often be incomplete. This can slow decision making and value creation. Common relevant data types include ownership, financial performance, operational progress, sales and marketing, supply chain, human capital, and most recently ESG, among others.

It’s a problem we also face as auditors. If data isn’t available in usable digital form, we’re unable to apply the sophisticated tools and methods we must make the audit more efficient, more reliable, and generate the additional insights. We believe that every stakeholder in the private equity industry has much to gain from digitalisation.

Approaches to solve the problems

PwC’s Annual Global CEO Survey 2021 suggests that Swiss CEOs have relatively few concerns about technological change, reflecting Switzerland’s high level of training and education, its openness to technological progress, and its confidence in its own strengths. However there is a lot of work to be done. From an auditor’s perspective these major challenges can only be approached by combining and aligning the interests of the stakeholders in an effort to ultimately maximise investor return in a sustainable manner. And many, including ourselves, have already started on this journey, by focusing on the following dimensions of their transformation and digitalisation journey:

1. Streamlining of processes: lean processes not only result in cost savings, they also improve quality and flow of information, pave the way for smooth digitalisation and improve employee morale. After validation, auditors can also rely on effective and efficient processes linked to financial reporting.

2. Structuring of data: machine-enabled structuring of data increases the quality and speed and reduces friction. Auditors can deploy various digital audit techniques, including analytics and AI, to more efficiently gain comfort over data, IT and application controls.

3. Investing in technology: Getting rid of legacy systems, investing in enhanced data warehouses, analytics platforms, document management systems and smart workflows, cloud technology, state of the art CRM and ERP systems are some of the ways in which leading firms are transforming.

4. Upskilling of people: Business-led technology implementation can only take firms so far, what is really needed are people who are digitally upskilled that can handle the new technologies and most importantly derive the right insights relevant to appropriate decision making. This mismatch between people’s existing skills and the demands of the digital economy is an important societal and economic problem to solve. For example, at PwC we are also on a journey to upskill our entire workforce, last year we have launched “New world, new skills” - an initiative to tackle this important problem for our people, our clients and communities in which we operate. Sustainably.

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