Digital technology and private equity opportunities and risks for PE companies
Published: February 13, 2020
Updated: February 13, 2020
It's no secret - advances in digital technology are the hallmark of our times. Known by several terms including the Fourth Industrial Revolution, Industry 4.0, or Internet of Things (IoT), industry experts define this era as the fundamental re-structuring of our economy and the re-defining of the very nature of our work through widespread adoption of ubiquitous technology in the form of mobile internet access, hyper-fast network, and artificial intelligence (AI).
These digital advances will lead to continued global growth across a range of industries and services – from manufacturing to financial services. These trends are no longer characterized by simply creating and using websites and mobile technology. They have rapidly moved from a ‘nice-to-have' to a critical component of surviving and thriving, and the key is to understand the trends that affect your business and apply them to your operating model. From a private equity (PE) perspective, this is especially true.
Where do you start? How will digital technology affect your current and potential portfolio firms and what are the implications? BDO breaks it down into the four digital technology trends that those in the PE world should consider.
The shift from simply analyzing data to actually using it to predict outcomes is becoming common practice. The emergence of large data sets, acquired from the widely accessible and powerful tools in the marketplace, is enabling faster business cycles and improved decision-making. Modern analytics also features new forms of information including image, video data, and repositories of data termed ‘data lakes’.
There’s a good chance that the competitors of your portfolio companies are using modern data analytics, so each day that your companies don’t evolve with modern analytics could mean a lost opportunity. If they are in the early stages of analytics, do they have a roadmap of expected investments and ROI?
Global data creation is now in the billions of terabytes and storage and analysis of this data is moving into the ‘cloud’ – networks of servers with internet-based applications. Reliability, speed, and security have improved to the point where cloud computing can be thought of as a utility.
If your portfolio companies have moved to the cloud, are they taking full advantage of them to accelerate growth? If they haven’t moved to the cloud, do they know that continued use of legacy systems with on-site hardware creates potential operational risks, greater business disruption, and cost when they finally do make the move to the cloud?
AI is a term that describes complex systems that display ‘intelligent’ behaviour and augment or replace human effort in the workplace. This trend evolved from the development of computers in the 1950’s to today’s ability of AI-based systems to make judgements and potentially replace skilled professionals.
Given that AI will not affect all industries in the same manner, do you know which of your portfolio companies are susceptible to AI disruption? And which of your companies are effectively incorporating AI into their strategic and operating plans? How are they doing it?
The downside of the rapid advances in digital technology is the increasing frequency and severity of cyber-attacks. These attacks now cost the global economy hundreds of millions of dollars each year. Unfortunately, many companies first think about a comprehensive cybersecurity plan after an attack.
Any company without a cybersecurity plan is at risk of business disruption and financial loss – period. Have your portfolio companies considered the consequences of a cyber-attack? Are they prepared? Could they survive the potential damage of a ransomware incident? How do you know?
Contact BDO's Private Equity advisors to discuss preparing for digital trends in the industry