Designing for Value in Private Equity
How PE firms can innovate with human-centered design
In the last few years, many private equity firms have been expanding their portfolios with acquisitions in technology companies whose main output is innovation and intellectual property, in a race to spot the next Google or Apple. Vista and Thoma Bravo have invested $16 and $12.6 billion, respectively, in technology companies, and Advent and Bain Capital have been betting heavy on IP-driven companies with specialist technology funds, according to Bain. While these purchases intend to reward many PEs with superior returns, long-term investments in IP-driven companies (given their innovative nature and lack of benchmarks) make assessment of assets more intangible and future performance more uncertain. Fund managers are now faced with questions like, “How do I value the autonomous car service of the future?” or “How is edge computing going to transform my portfolio company’s business model?”
These types of questions are increasingly pressing as the consumption and curation of data to draw forward-looking insights becomes one of the most important roles of the PE analyst. Yet many traditional PEs are working with static PDF reports and excel spreadsheets, with workflows caught years behind the companies they are investing in. Making optimal investment and management decisions for an unpredictable future is difficult without the right tools. A lot of PEs we work with have taken on the role of digitally transforming their more traditional portfolio companies. We are often brought in by PEs to design platforms to help their portfolio companies optimize operations or accelerate product innovation — but there is a need for the PE industry to digitally transform itself as well.
How can PEs do this? It starts with human-centered design.
PEs can use design to build technology platforms that uncover the right insights, to accumulate proprietary knowledge that creates a competitive advantage, and ultimately, to ensure firm-wide agility and resilience.
As PE firms continue to scale, design led digitization can help lay the groundwork for firm-wide adoption of ever growing data streams and cutting-edge AI/ML analytics.
Use design to create an information advantage
Typically, PE firms focus on three sources of value to generate returns; buying low and selling high, financial restructuring using debt, and value creation through operational improvements. All investment and asset management activities are organized around these critical value levers, resulting in an organizational model positioned to generate above-average returns. Yet the continued success of many top PE firms is often attributed to their star fund managers with their track record of portfolio performance.
But portfolio companies do not exist in a vacuum. Their performance is impacted by human behavior, by policy, by the environment. Increasingly, investors are watching “non-financial data” like environmental, social and governance metrics, or data from social sentiment analysis, as leading indicators of their portfolio company’s market success. Moody’s is already incorporating ESG metrics and climate risk in its analysis for company credit ratings, largely driven by demand from investors.
In this changing landscape, how can PE firms use data in an insightful and actionable way? Design brings visibility and control. Well-designed technology can not only empower the star analysts to interpret large volumes of new kinds of data but also augment the entire organization by democratizing access to data and analytical tools. This means tracking more kinds of data, ingesting and digesting it in useful ways, and visualizing it in ways that allows analysts across the PE firm to make quicker, more strategic portfolio management decisions. Advanced analytics and intuitive data visualization can lead to better prioritization of portfolio management initiatives for better portfolio performance.
Use design to create a competitive advantage
As PE firms struggle to compete with each other on technology investments, some technology companies themselves are adding venture arms to their already-sprawling enterprises. Amazon has launched a $2 billion fund to invest in companies developing “sustainable technologies and services.” Two Sigma, a multibillion dollar quantitative hedge fund, was an early pioneer in this space, establishing itself as a technology company that manages investments. Besides a tech-enabled operating model, Two Sigma also offers to the market its IP-based service in the form of an investment and portfolio analysis platform, Venn. CircleUp is another private investment platform that offers entrepreneurs and investors valuable insights via its machine learning platform, leveraging data from millions of companies to accurately evaluate portfolio company performance.
When contrasted with these companies, how can a more traditional PE firm remain attractive to the most attractive, “next-gen, tech-enabled” businesses? How can they reasonably expect to invest in a data-obsessed technology company like Uber without becoming similarly data-driven? How can PEs attract investors and partners by offering solutions that are aligned to their needs? To stay relevant, PEs need to be measuring themselves by the same standards as they will their future investments. This means analyzing the PE operating model to uncover new value drivers that technology can augment and enable.
How do we uncover those value drivers of greatest impact? We listen. Design thinking methodology starts with listening to the stakeholders — investors, boards, analysts and fund managers — so that we can build digital solutions that stakeholders will actually value. We then map the evolving investment ecosystem to create solutions that are scalable for the future. This approach helps PEs identify opportunities across their value chain of increasingly demanding investor expectations and their IP-driven investments.
Use design to create agility and resilience
Investing in digital for digital’s sake, however, is like deliberating over which expensive knife you should use to cut a hole in your pocket. With plenty of open-source and commercial technologies available in the market, many of our PE clients are faced with strategic choices around what to build, what to buy, what to outsource, in order to reshape their future-ready operating model. But none of it matters unless the needs of users — fund managers and others in the weeds of the data — are relentlessly prioritized. What are the goals that they are trying to achieve? What key decisions do these managers need to make day-to-day? What insights need to be quickly gleaned, and which need to be discovered through granular reporting? What does success look like, and what are the right metrics to measure it?
For new products to be adopted, evangelized and accelerated, they need to be not only financially viable and technically feasible — they need to be desirable. User-centric product development can be the differentiator that ensures continuous collaboration with users and innovates on their behalf. Design plays a critical role in prioritizing the right use cases, creating a product roadmap proactive to users’ emerging needs, and allowing for iterative product development through measurable user feedback.
Integrated design and technology solutions that continually learn and scale are vital in an industry where knowledge and speed generate higher returns. Leveraging the human-centered design process will allow PE firms to not only accelerate their own technology transformation, but also build agility and resilience to maintain future industry leadership in a rapidly changing marketplace.
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This article was written by Priyanka Gaitonde and edited by Erin Peace. Illustration by Claire Lorman.