Digital transformation spending could reach $3.4 trillion by 2026 as more organizations integrate new technologies that revolutionize how they do business. In the private equity (PE) industry, companies face unique challenges when embedding digital technology at scale, including uniting disparate legacy systems that, for one reason or another, can't communicate with one another. That results in data silos and fragmentation across the organization, which restricts digital innovation.
Keep reading to learn more about how private equity firms can combine disconnected systems for improved efficiency, scalability, and digitalization.
What is private equity digital transformation?
Digital transformation is the implementation of new technologies to improve business processes. For private equity firms, this might involve upgrading systems, automating manual processes, improving cybersecurity, and using digital analytics to identify patterns and trends. Eighty percent of PE leaders say mature digital investment opportunities at portfolio companies drive value.
Private equity digital transformation isn't an overnight process. It requires PE firms to establish a problem statement explaining how their current technology impedes day-to-day operations. Then companies should devise a digital strategy that outlines the steps for successful digital transformation , such as choosing the right technologies to integrate into their business. These technologies might include application programming interfaces (APIs), artificial intelligence (AI), machine learning, the Internet of Things (IoT), big data, data analytics, cybersecurity, the cloud, and even blockchain.
Digital transformation benefits for PE firms
There are multiple benefits of digital transformation for the private equity sector, including increased portfolio value and operational efficiency.
Reduce risks
Updating legacy technologies with modern technologies makes your company less vulnerable to security risks. If vendors no longer maintain your infrastructure or release security patches, hackers can easily access your sensitive data, destroying the reputation of your private equity firm. A digital transformation initiative lets you replace older products with safer technology.
Improve operational efficiency
Automating manual tasks with the right tech stack will free up resources for your team members, enhancing productivity in your PE firm. Plus, you can streamline jobs in your workflows and optimize cost-cutting measures. A successful digital transformation process will change how you do business in the future.
Increase the value of a portfolio company
By encouraging your portfolio companies to integrate new technologies into their business model, they can automate processes, improve customer retention, and generate more revenue. That can increase the value of these companies, enhancing your overall portfolio and establishing you as a leader in your field.
The pitfalls of legacy technology in PE
Research shows that 31% of an average organization's technology consists of legacy systems , such as outdated customer relationship management (CRM) platforms. These technologies once served a purpose, but now hold back many private equity companies, leading them to invest in transformation. Here are some common issues with legacy systems:
Difficult to scale
Many legacy technologies just don't have the ability to scale due to high costs, inefficient workflows, and an inability to integrate with other tools, making it difficult for PE firms to grow their businesses . If you can't increase the performance of an outdated system, you might find it difficult to acquire new customers, secure a new investment, expand your portfolio, and generate value creation.
Data silos
One of the biggest issues with legacy systems is data silos, where different departments in your organization can't communicate with each other because of outdated and disparate technologies. For example, your finance department might use a different platform than your compliance department, making it difficult for these teams to collaborate.
Higher costs
In some scenarios, it can cost tens of thousands of dollars a year just to maintain and renew legacy software. These tools might require physical backups because they can't connect to the cloud, requiring specialist IT professionals. Alternatively, legacy tools might need manual coding to keep them secure because their original vendors no longer provide security patches.
Time-consuming workloads
Legacy systems require more attention than new tools for several reasons. For instance, staff might require extensive training to use these platforms because they are unfamiliar with them. Moreover, outdated software might not comply with data governance frameworks like GDPR and CCPA, meaning you need to manually review the data you store in these systems.
Challenges of digital transformation for your firm
All industries struggle with digital transformation to a certain extent. However, there are unique challenges for PE equity investors who want to improve digital capability and digital maturity.
Data fragmentation
More than other industries, private equity involves working with various stakeholders that offer business services, such as portfolio companies, mature companies, startups, and organizations facing financial challenges. These businesses might be in industries as diverse as real estate, retail, professional services, and manufacturing.
Information from all these sources is likely to be housed in different locations, such as private databases, CRMs, analytical tools, and various websites, which results in data fragmentation across your software supply chain. Integrating all that data into a centralized system—a tenant of smart digital transformation—can be a challenge.
Data governance
Because PE firms deal with companies in many industries, they have to abide by multiple data governance frameworks. For example, a private equity investor might need to comply with GDPR if they have clients in Europe, CCPA if they share data with portfolio companies in California, or HIPPA if they manage finances for healthcare organizations. Sharing information between systems and creating a single source of truth for data can be an uphill struggle when PE companies need to comply with so many regulations.
Cybersecurity
Cybersecurity is a huge consideration when investing in private equity digital transformation. Moving data from a legacy system to a new platform, for example, could expose that information to hackers, causing a data breach. While cybersecurity is a concern for all sectors, the private equity industry is a target for cybercriminals because it collects, processes, and stores highly sensitive and lucrative financial data.
Uniting disparate business systems
Integrating business systems is essential for optimizing their usefulness. This integration can lead to improved outcomes, including consolidated resources, enhanced customer experiences, and increased efficiency and scalability. By uniting systems, private equity firms can save time and money by quickly accessing necessary data without extensive IT assistance.
There are various ways to achieve this, such as investing in data integration methods like Extract, Transform, and Load (ETL). ETL pulls data from isolated platforms, transforms it into the required format, and pushes it into a data warehouse. Business intelligence (BI) tools can then analyze this data, providing insights into PE workflows. Other integration methods include APIs and point-to-point integration.
Using AI and machine learning in your digital transformation strategy
Artificial intelligence (AI) and machine learning are valuable technologies to incorporate into your digital transformation process. They can improve efficiency, customer experiences, and data analysis.
Efficiency
AI and machine learning streamline manual tasks within a PE firm, such as data entry and administrative responsibilities. AI systems can categorize, verify, and remove duplicate data sets from databases, ensuring the availability of accurate and high-quality information and improving overall efficiency.
Customer experiences
AI and machine learning assist in enhancing customer satisfaction. Chatbots, for example, provide 24/7 support, enabling customers to inquire about PE services without human intervention. By leveraging marketing cookies and AI, personalized product and service recommendations can be delivered via emails and other communication channels, creating a better online experience for customers.
Data analysis
AI and machine learning systems generate reports on private equity workflows, ensuring effective data analysis. For example, they help identify investment opportunities and visualize fund performance through charts and graphs.
Integrating disparate systems for PE firms
Embracing digital transformation has become a crucial investment decision for private equity firms. By reducing risks, improving operational efficiency, and increasing the value of portfolio companies, they can compete with major players in the industry. Uniting disparate legacy systems within the organization plays a vital role in eliminating data silos, enhancing scalability, and reducing time-consuming workloads.
Codal, a full-stack enterprise design and development consultancy, specializes in helping PE firms accelerate and optimize their digital transformation . Experienced in re-architecting ecosystems for organizations managing multiple brands under one roof, Codal can provide data-driven, AI-enabled strategies and solutions that modernize technologies and unite disparate systems throughout your business.
