How digitalisation can empower post-investment management of private equity funds
- Limitations on existing management methods face challenges in creating value
- Digitalisation should be led by company-level policies within investment institutions to effect change, says strategy firm EY-Parthenon
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Achieving higher returns by empowering invested enterprises and creating value is an important objective for investment institutions.
Hundreds of funds in China select IPOs as an exit path, while the top two exit routes of private equity funds in the United States are transacting in the fund secondary market or going down the path of mergers and acquisitions. The proportion of exits through IPOs in the United States is just 5 per cent, according to data from PitchBook.
Several factors can affect the choice of investment institutions for post-investment management methods. The first is the type of investment. For financial or strategic investments, for example, investment institutions usually influence corporate governance, executive team-building, incentives through the board of directors or the assignment of key personnel.
Planning corporate strategies, seeking new finance channels and designing capital structures often become the focus for post-investment work. However, in the case of mergers and acquisitions, it can be difficult to change processes from within, whereas external investors are able to make the necessary changes to reduce costs and increase efficiency. This can enhance the value of the company by reconstructing business models from the perspective of strategy, business, operation management and organisational culture.
The second factor is the growth stage of the enterprise. For businesses in the start-up phase, establishing a core team, building equity structure and completing the business model by a process of trial and error can be critical. Enterprises in the growth phase usually require improvements to their business and profit models. And even those that are well established generally need a more comprehensive company strategy to achieve standardisation and scale benefits.
Lastly, the management maturity of the enterprise may influence post-investment strategies. Those methods will depend on the resources and capabilities required by the investment institution.
Investment institutions usually adopt different types of post-investment management models.
The first type comprises an investment team that takes responsibility for post-investment management. Ideally, the team should be well trusted by those within the enterprise. However, it may soon find it does not have sufficient time and resources to meet an ever-expanding list of tasks.
A second management model is where a professional post-investment team takes responsibility for post-investment management. The team will have all the time and resources it needs, yet its results may be difficult to quantify. Such a team usually focuses on broad functions such as human resources, financing and capital operations as well as public and government relations.
The third management model is where the investment and post-investment teams are jointly responsible. This makes the most of the skills of each team, but it may prove difficult to fully motivate the post-investment team due to its nature as a cost centre.
The fourth and last model involves an external professional team (Capstone model). This management model provides full life cycle post-investment management for investment projects and also acts as a profit centre to charge portfolio companies. This model is rarely used by institutions in China.
In practice, investment institutions face big challenges, including information asymmetry with management, lack of agreement on future strategies or the business direction of an enterprise, and a lack of effective methods and tools to drive changes in management.
For many invested enterprises in traditional industries, digitalisation may serve as an initial entry point to empower post-investment management. This is done in a number of ways, including continuous monitoring and risk identification.
“Digitalisation is not just about information technology,” says Agnes Cui, EY-Parthenon partner, greater China. “It should be led by company-level strategies such as organisational change and process re-engineering.
“The building of digital infrastructure is a long-term project that requires sustained investment in both software and hardware. In advancing the transformation of traditional enterprises, companies can choose a suitable application scenario as a starting point. The gradual formation of a data-driven culture will also promote the development of digitalisation within the enterprise.”
Investment institutions need to understand what happens to the operations of an enterprise after investment and continually monitor the business to minimise risk.
Digital methods and tools, such as business intelligence (BI) reports and data dashboards, can help investment institutions obtain up-to-date, sustainable business analysis and results, thus helping invested companies set targets and clarify what matters most.
They can also assist enterprises in reducing costs. By analysing past cost-management data and applying predictive analytics techniques, investment institutions can help invested enterprises gain a deeper understanding of cost drivers and their relationships. This will help them optimise existing operations and predict the impact of future decisions on costs.
Digitalisation may also improve the scientificity and efficacy of business decisions. How well an enterprise knows its customers determines the effectiveness of its product design and marketing promotions, for example. For business-to-customer enterprises, digital tools can help obtain customer data that was previously unavailable and perform large-scale analysis to form accurate customer portraits and key business decisions.
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