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How Digital Transformation Can Accelerate Your Investment Portfolio Growth

Sergey Kovalenko

Director, Account Management, EPAM Netherlands
Blog
  • Financial Services

Digital transformation has been a high priority for private equity (PE) firms in recent years, as companies are realizing that simply buying a stake at a low price and selling it later for a multiple will no longer deliver the expected return in this highly-competitive market.

Technology is a powerful tool to boost the value of a business, such as leveraging intelligent automation to optimize process efficiency and improve operating margins or building new digital solutions that drive EBITDA growth. Successful implementation can deliver an exponential increase in the portfolio company valuation and significantly accelerate the realization of the equity story.  

However, pitfalls lie in identifying areas of the business where investing in digital can deliver a fast and feasible return before exit, as well as executing those changes reliably and efficiently. These decisions require surgical precision, as the cost of mistakes can be substantial. Technology investment can be expensive by itself. Even when the potential digital change is properly identified, the risk of getting stuck in a long, ineffective transformation project due to an unsuitably designed target system or underestimated complexity can potentially compromise the whole investment case.

So how can PE firms take advantage of innovative technologies without getting stuck in a never-ending cycle of transformation projects? 

Put Digital at the Center of the Due Diligence Process

Before any implementation begins, it’s crucial to assess the maturity of digital adoption and identify the potential areas of risks and gains. Different investment scenarios should present themselves. Digitally-native companies will usually hold a significantly higher value and represent less investment risk but leave less space for transformative growth, while more conservative businesses with a longer history of operations and legacy technologies will typically have low-hanging fruit where significant returns can be achieved through targeted, technology transformations.

In either case, you need to know what you’re buying and put transformation at the center of your investment strategy. That’s why assessments should go beyond ‘traditional’ technology questions, such as cloud readiness and architecture quality, to include the following topics:

  • Leadership team transformation mindset
  • Digital business and product strategy readiness
  • Culture of business process optimization (i.e. paper versus Excel versus digital)
  • Change management 
Hire Strong Technology and Change Leadership Inside the Portfolio Company

Change is spread from the heart of the organization, not from the outside. A management team that understands and supports digital change is critical. It’s possible to start with interim leadership either provided by the PE or a partner, but in order to achieve long-standing and sustainable results, hiring a digitally-born C-level executive is a key step forward. 

Find a Partner with Universal Technology Capabilities and Scale to Help the Portfolio Company Execute ROI-Driven, Pragmatic Transformation

For PEs and their portfolio companies, it’s almost impossible to run an internal delivery organization that is technology-agnostic and can deliver transformation in any area of the business. In most cases, these skills are not needed internally, as transformation projects tend to have clear execution timelines where specific skills are needed and substantially smaller demand for a large headcount once the change is delivered.

Apart from the core leadership team, hiring and maintaining a large headcount inside the portfolio company is an unnecessary burden. On the other hand, working with traditional suppliers could be complicated due to slow knowledge acquisition, cultural differences and, most importantly, unbalanced interests. The PE’s goal is to achieve the highest return on investment in the shortest possible time, but suppliers typically benefit from larger, longer and more complicated transformation programs as this drives their direct revenue.

The key to success is to create alignment between the core business interests of the PE, portfolio company and technology partner, which demands a new, non-trivial engagement and contractual approach. For example, EPAM developed a unique engagement model where we co-invest in transformation change implementation with the PE and portfolio company.

Technology as a Capital Growth Enabler

Technology has the potential to significantly increase portfolio company value and equity. To be successful in achieving digital transformation, PEs need to focus on effectively assessing their technology and business ecosystem, ensure the right leadership is in place and work with the right partner to bring these initiatives to life.

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