The last private equity value creation lever: digital advantage

Last week I led a meeting with the operating partners at a global private equity firm. The firm in question is a market leader whose portfolio spans industries and geographies, ranging from high-growth businesses to mature ones. In many ways, this firm represents the epitome of what one expects from a generalist private equity firm: smart individuals investing in and transforming a diverse group of companies.


The operators in the room had more years of experience at the ‘coalface’ of operational improvement than I would care to count, but the discussion we were having was about a value creation lever that most of them had yet to grasp: digital advantage.


The word ‘disruption’ is overused and, frankly, abused. However, there is no denying that the rapid advancement of the Digital Age – the confluence of social media, smart devices, big data and cloud computing – represents both a massive opportunity for value creation in portfolio companies, as well a huge threat to existing value for those who ignore it.


We view the advance of digital business as coming in three waves. Operating partners, management teams and entrepreneurs that understand these three waves will be better equipped to defend and create value in the Digital Age.


First digital wave

The first digital wave, that of Digital Commerce, has been with us for some time and is typified by previously offline businesses opening up digital channels alongside existing routes to market. This can be extremely valuable for both cost efficiency and top-line growth.


But even if Digital Commerce has been with us for many years now, smart devices and an emerging generation of ‘Digital Natives’ – those who have grown up in a digitally connected world – are changing the dynamics and creating new opportunities.


Non Digital Natives typically look at digital as a channel on which they can transact, implicitly valuing usability and simplicity. Digital Natives go beyond that, seeing digital as a “natural language”, and as an opportunity to engage with their own lives and goals in a visual and interactive way.


That’s why – in, for example, the retail sector – Digital Natives value not only the presentation of the store via an online channel, but also bringing digital into the store. They use great digital experiences as their benchmark; they almost want to walk into a website when they shop in the physical world; they want the option to double tap on things, online or not. So even if a company has been online for many years, it is very likely that a great deal of opportunities exist to create additional performance and advantage.

In our view this first digital wave is all about the ‘Economy of Products and Services’.



Second digital wave

If the first digital wave is all about advertising, marketing, selling and supporting products and services, the second digital wave is all about helping people achieve goals they care about. Simple goals can be achieved using well-engineered products (as an extreme example, the goal of opening a bottle of wine can be perfectly “achieved” using the product we call a cork screw). But as goals become more valuable and more complex, engineering products and services to deliver these goals becomes increasingly hard.


A few examples? Personal fitness, healthy eating, a cleaner home, safer driving, greener/cheaper household heating, listening to music that I really like, etc. … These outcomes are not for sale per se, because they are not easy to engineer into a specific product or service. Why not? Mainly because in order to achieve these outcomes the customer will need three things that are hard to get: they need to understand their own behaviour better; they need some help with their discipline and will power; they need their partner/supplier to understand their individual needs and wishes really well.


And that’s exactly what digital technology can help brands and customers achieve today. Sensor technology, such as a Fitbit wristband, can help us track our physical activity. Social media and peer-to-peer comparison can help us stay focused. Platforms such as Spotify can capture the unique way in which we listen to music (what, when, how often, etc.) and use this wealth of consumption data to learn and shape our unique music taste. In-car telematics can give us lower insurance premiums if we are consistently considerate drivers, and even help us drive in a safer or greener way. The possibilities are endless.


There is an additional bonus; in this second digital wave, we are not transacting. We are playing a “life videogame” that is fun, interactive, engaging and real, because the goals we are chasing are real.


In our view this second digital wave is all about the ‘Economy of Outcomes’.


Third digital wave

The third digital wave, that of Digital Identity, will turn the idea of consumption on its head.


Consumers’ data, collected by smartphones, fitness wrist bands, smart gas and electricity meters, car insurance monitors and all manner of other sensor devices, are there to be interrogated by trusted businesses, who can then tailor their offers to the individuals, or broker offers from other players in the ecosystem, as, for example, in a reverse auction.


As a consumer, I will release my energy usage data and receive tailored offers from suppliers. I will release data from my music streaming account and it is up to music streaming suppliers to tailor an offer for me based on how expensive my musical taste is.

Of course there are non-trivial privacy issues here, and we are squarely in Big Data territory. But let’s think about this; the Big Data that the customer fears is a scary entity. It is a ‘Big Brother’ to which you surrender your data, who then uses data in ways unknown to you for purposes that you have not approved. It will give you neither “editing” nor “deleting” rights. We call this the “Selling Big Data” and it does exactly what it says on the tin: it harvests and hoards customer data of all sorts, and crunches this data behind the customer’s back with the objective of selling more things and making more money.

“Selling Big Data” invokes relevance – helping companies market the right products to you – as an honourable justification, but very often it erodes trust.

But there is also another version of the Big Data story: “Buying Big Data”.


In this version of the story the customer does not surrender his/her data, but volunteers it. Why? Because it helps the customer achieve valuable goals; because the status of the customer as the legal owner of his/her data is recognised and respected; because the customer has full “editing” and “deleting” rights on this data, no questions asked. In this world of “Buying Big Data” the customer is in control, and his/her data is like a currency. That’s the key: in the digital age personal data is not a product to be sold for money, but a currency in its own right that can be spent to get to things that money alone can’t buy.


In our view this third digital wave is all about the customer’s Digital Identity, and how this enables the ‘Economy of Wishes’.


Implications for private equity firms

For private equity firms, financial engineering has been a diminished part of the toolkit for some time now. The industry today works hard to drive operational improvement within its portfolio companies. For the private equity operating partners with whom I talked through these ideas last week, the value creation opportunity presented by the digital revolution is now undeniable. Efficiencies and opportunities abound from the back office, to the front office all the way into to the customers’ homes.


We anticipate that programmes to optimise portfolio companies’ digital fitness will become as important a value creation lever for private equity firms as programmes to reduce costs, improve working capital management and optimise the supply chain. Private equity firms that can demonstrate a positive digital track record will become more attractive business partners and a more compelling investment prospect.


We have helped a number of private equity firms by assessing digital opportunities across their portfolios and undertaking specific digital interventions, as well as supporting deal sourcing and digital due diligence. In our next post we will further discuss how private equity firms are taking advantage of the many opportunities that the digital age presents.

If you would like to have an exploratory discussion about the digital fitness opportunities within your portfolio,, then please contact me using the details below.

Carlo Gagliardi | Partner
Profile | Email |  +44 (0)20 7213 5659


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