Is Digital Transformation driving Private Equity 3.0?

By Jon Tanner

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All that glitters is not bitcoin. PE, meet DX. A lot has been said about the current “Golden age” of private equity. Some thought it was peaking in 2016. Similar questions were also debated by leading executives and business schools in 2010. So are we at the beginning or the end, or just the end of the beginning?

The number of firms and capital in the market globally has increased every year since 1999 until now, and according to BCG we are in a new boom. We saw a record of USD $681 Billion invested in PE funds in 2016 (up 9% on the prior record set in 2015) and expect to have closed another record year in 2017 as predicted by Forbes.

With so much capital to be deployed, there is significant competition and pressure for funds and firms to identify new opportunities and points of leverage. I was recently in a conversation with a very active Private Equity investor who made the comment “I’m not interested in buying businesses that are already shooting the lights out. There needs to be an opportunity to find and drive value beyond just funding scale”. While I get this is a completely reasonable, perhaps expected, point of view for any PE firm to take, I suspect many firms are still looking through the lens of more traditional commercial remedies for improving distribution, removing costs and consolidating operations.

“More than half of all DX investments in 2017 will go toward technologies that support operating model innovations.” IDC Digital Transformation Spending Guide 2017

Accelerating sales, distribution, and efficiency is now hard linked to the optimisation of digital channels, devices and data to generate customer insights, penetrate new markets, innovate new products or produce new lines of service. IDC research indicates that, the value of investment in digital transformation (DX) was USD $1.2 Trillion in 2017 at a CAGR of 17.9% expected to 2020 and beyond.

Over the past 20 years, there has been a huge variance in the successes and failures of digital execution across industries, geographies and organisations. There is enormous scope for effective digital transformation to be the significant lever in the amplification of value in the vast majority of legacy organisations. The level of investment we have seen from global advisory and tier one strategy firms in digital leadership and competency development over the last 18 months is unprecedented in our 17-year history. I feel this is a leading indicator of the global market demand for innovation advice and execution we are yet to realise.

“I’m not interested in buying businesses that are already shooting the lights out...”

For PE firms the opportunity to turn around, scale or improve the future state of any business is now critically linked to digital transformation. At MitchelLake our own business relationship with private equity is changing. Where once we were typically sought out for leadership talent for pure-play digital and technology ventures, over the last five years we have been more frequently engaged by the enterprise, and now mid-market companies, to identify and secure digital transformation leaders across all categories of business. In the last 12 months, we have successfully executed executive searches for numerous mid to large cap (~USD $1 to 5 Billion revenues) entities as diverse as medical devices, property development, consumer & commercial real estate, infrastructure & logistics, retail, automotive and media.

What has surprised us is not just the uptick in interest around digital transformation itself, but the level of candidate and investment that mid-market and challenger brands are now willing to consider. In many cases, they are now competing at similar (or in some cases higher) levels as multinational corporations. It is clear that mid-market owners, boards and executives are starting to recognise the scale of both opportunity and the challenge that lays in front of them if they are to successfully transition from current business to future state. Additionally, roles and titles are morphing from VP of Digital and Chief Digital Officer to broader commercial interpretations of senior executive Innovation and Product leadership.

While players like Deloitte note that the mid-market might be catching up (Wall Street Journal 2017), we see a clear opportunity for private equity players to leverage talent and technology without the inertia inherent in institutionalised business models, technology debt and stakeholder resistance that has clearly hindered the digital efficacy of the more mature enterprises and industries.

While ideas and capital are relatively abundant, the ability to lead and execute positive change is not. We welcome contact from companies, firms and individuals who want to know more about how we can help navigate and realise their future potential in the digital economy.

Jon Tanner is the Managing Partner & Global CEO of the MitchelLake Group