The ability to transform businesses through digital is one of the greatest value creation tools available to private equity. While time constraints may present a challenge, prioritizing and implementing the right digital investments can be a highly effective way to deliver efficiency improvements, revenue and earnings growth, and drive a high return at exit.
In a recent survey of 100 mid-market PE firms, we explored how they prioritize digital investments, how they define it, and what technologies are driving the most value. When evaluating digital investment opportunities and strategies for your PE playbook, you may want to consider the following best practices:
Digital can be defined in many ways and enhancements can improve operations, productivity, and customer experience. Whether you adopt a common definition or create your own, it should be discussed and defined. Otherwise, if you are not aligned on a definition, how can you decide where to create and measure value?
Determining a common definition will provide a strong vision that guides strategic investments. Further, a documented digital strategy does one crucial and commonly overlooked thing: It defines and prioritizes the highest potential digital value creation areas.
With endless options available, many companies tend to struggle with prioritization: After identifying multiple digital projects, they either default to taking on too many or choose what is easiest to implement versus what will drive the most value. Neither approach will deliver desired results. Instead, concentrate on implementing a single or very limited number of digital initiatives. With digital, it is best to think big but execute iteratively.
When prioritizing digital investments, carefully consider how long it will take to realize value and how that affects the hold period. Digital often requires a substantial change in a business’s operations, organizational structure, skills, capabilities, and processes, all of which takes time. Agile, test-and-learn methods are typically the best approach. Bringing in the right resources may be necessary, internally or externally, as digital is a relatively new skill set.
Whether or not digital investments have time to fully materialize before the exit, growth in digital maturity should be viewed as an asset during the sale process. It is important that the company’s digital vision, strategy, and progress is clearly articulated to potential buyers since digital companies typically command higher price multiples.
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