New West Monroe Study: Digital Capabilities Will Separate the Best and Weakest Performers in Private Equity

CHICAGO- Private equity firms are poised to benefit from digital by delivering efficiency improvements, revenue, and earnings growth that yield higher pricing multiples at exit. Yet many firms are not equipped to seize the digital opportunities available to their portfolio companies, according to a new report released today by business and technology consulting firm West Monroe in partnership with Mergermarket.The firm released its results in a new report, “Digital at the Speed of Private Equity: How to Increase EBITDA through Digital Investments in the Middle Market.”

Only 42 percent of private equity firms report having a standard definition of digital that guides strategic decisions and aligns all parties. Additionally, 40 percent say that half or fewer of their portfolio companies have a documented digital strategy. 

Most private equity firms, however, recognize the value of digital and believe it has an impact on exit price. Half of general partners include digital value creation as part of their investment thesis, and more than 8 in 10 respondents said they view mature digital investments at a portfolio company as a value driver at exit. 

“From our perspective, digital will define private equity’s next chapter. In the sky-high valuation environment of recent years, the need to identify innovative and effective investment angles to create value has never been more pressing,” said Nick Hahn, a director of digital transformation at  West Monroe. “The ability of firms to develop a digitally led investment thesis, carry out effective digital diligence, and deliver on their strategies will separate the industry’s best and weakest performers.”

West Monroe, in partnership with Mergermarket, surveyed 100 executives of U.S.-based private equity firms that invest in middle-market organizations across a range of industries. The survey explored the extent to which private equity investors prioritize digital today, key challenges, and specific opportunities for realizing benefits.

“While private investors are innately pragmatic about deciding which project to execute, they can be skeptical when it comes to digital projects, often viewing them as a cost center or taking too long to deliver,” said Brad Haller, a director in West Monroe’s Mergers & Acquisitions practice. “As technology advisors to the private equity space, we see an opportunity for the industry to shift its thinking to digital as a growth-enabler.”

Other key findings of the report include:

• The need for digital is driven by both internal constraints and external market forces. Nearly a third (30 percent) of respondents cited competitive disruption as a key driver, while 26 percent reported a high level of operating inefficiency and cost and 22 percent reported rising expectations around customer experience. 

• While digital diligence focuses most on a company’s efficiency (100 percent), most private equity firms (89 percent) also include maturity/competitive and productivity analyses. Nearly half of respondents (45 percent) said the single most important aspect of a target’s digital profile is the maturity/competitive component.

• Customer experience looms large when making digital investments: 40 percent of those surveyed said they prioritize investments that help the portfolio company keep pace with customers’ expectations. 

• Three quarters of private equity investors make digital investments in order to improve the exit price for a portfolio company without the expectation of performance gains before the sale. 

A full copy of the report is available here.

The study builds on West Monroe’s October 2018 research, “Digital Leaders: Learn from Digitally Mature Companies to Grow Revenue and Profits,” which highlighted key activities and characteristics that drive stellar financial performance.

About West Monroe Partners
West Monroe is a national business and technology consulting firm that partners with dynamic organizations to reimagine, build, and operate their businesses at peak performance. Our team of more than 1,100 professionals is comprised of an uncommon blend of business consultants and deep technologists. This unique combination of expertise enables us to design, develop, implement, and run strategic business and technology solutions that yield a dramatic commercial impact on our clients’ profitability and performance. For more information, visit www.wmp.com.  

About Mergermarket
Mergermarket is a business development and market intelligence tool designed specifically for the M&A sector and provides proprietary intelligence and analysis on corporate strategy across the world. With around 200 M&A journalists talking directly to senior executives, dealmakers and other key players in over 60 locations globally, Mergermarket reports on the whole deal life cycle, from mapping out companies’ early stage strategic intentions to tracking deals before they develop and providing real-time news on live events, thereby creating a large window of opportunity.  Subscribers can also mine for trends, patterns and deal ideas using Mergermarket’s comprehensive deals database and regular data-driven editorial analysis and commentary. Visit http://www.mergermarket.com/info to learn more.

Media Contacts
Christina Galoozis
cgaloozis@wmp.com
312.447.6623