Defining the Private Equity Firm of 2025: Five Predictions for Operational Excellence



This article was published in Mergers & Acquisitions in June 2021.

Across the private equity landscape, the events of the past year accelerated the digitization of an industry that has been traditionally, in some cases notoriously, slow to embrace technology. Among many other things, the global pandemic spurred a fundamental shift in attitudes among PE sponsors toward data and software across all operational aspects,  from due diligence to portfolio management to value creation tracking to day-to-day collaboration, information sharing, and communications.

The pandemic took hold during a prosperous time for PE. Those forward-thinking firms that had begun to embrace digital strategies were able to leverage the latest tools and cloud-based platforms to minimize disruption to their operations. At the same time, these platforms allowed for continuous monitoring of the impact of Covid-19 on portfolio health, yielding a real-time view of the state of affairs that could be confidently and transparently shared with understandably nervous LPs. On the other side of the equation, stragglers behind the technology curve were left drowning in a sea of spreadsheets and emails and found themselves relying on old-fashioned conference call bridge lines in an attempt to understand the impact quarantines and shutdowns were having on the portfolio. These shortcomings put both portfolio companies and LP relationships under immense pressure.

For sponsors that have invested in digital technologies, the past year delivered unforeseen returns and proved those investments to be prescient. Those who did not must now understand, with greater clarity, the importance of having a robust technology strategy.

As we look forward from this moment, hopefully on the cusp of finally besting the global pandemic, the fact is this: what was considered cutting edge technology in PE as recently as five years ago has now become the baseline requirement for all sponsors moving ahead. For many firms, this means escalating the pace of investment. For others, it means that a serious catch-up is in order.

Across the next five years, sponsors seeking to achieve Operational Alpha across the wider investment ecosystem, differentiate within the industry, distinguish themselves among LPs and provide significant value-add to the portfolio need to do so by actively pursuing digital strategies that exceed the bare minimum and facilitate best-practice operations.

By looking at the evolution of past technologies and evaluating emerging technologies taking root today, we can make five bold predictions about the future of best practice and the pursuit of operational excellence in PE:

Prediction 1: From Collaboration to Strategy Execution

Today’s collaboration and portfolio monitoring platforms allow sponsors to have greater visibility into value creation activities at individual portfolio companies and, more broadly, the overall health of the portfolio. While there is no doubting the value inherent in the insights, these platforms will evolve in short order to also become strategy execution platforms that allow users to not only track qualitative tasks assigned to quantitative goals, but also analyze the effectiveness of actions and strategies and codify repeatable best practices that can be institutionalized and deployed across the portfolio. This will be especially useful for sector-focused investors, since they can leverage actionable data from their existing portfolio company strategies to both improve portfolio performance and make more intelligent decisions when conducting due diligence on new investments.

Prediction #2: More Actionable Data, Less Noise

There is a gold mine of unused data potential that sits within many GPs’ portfolios. Perhaps even more importantly, there also exists a gold mine of knowledge and experience in the minds of the decision-makers. As more sophisticated modeling and analysis become commonplace, we expect to see a future where firms seek to capture more data, more often – including in real-time – to gain a deeper understanding of their portfolio companies’ performance relative to underlying industry trends. Proprietary data sets, effectively structured and analyzed to align with GP expertise, will emerge as a key differentiator in facilitating ongoing assessment and decision-making.

Prediction #3: Advanced Technologies Supercharge Origination

Machine learning, natural language processing, predictive analytics, and other advanced statistical algorithms will enable firms to create proprietary data sources with personalized recommendation engines capable of identifying potential investment opportunities in their sweet spot before anyone else. In addition, alternative data sources will be used with regularity to power unique insights into tracked companies and opportunities to identify add-on targets. Key to the success of strategies in this area will be the use of technology to both identify target companies and digitize the process of prioritization to more effectively focus and maximize analyst resources.

Prediction #4: Powering the Underserved

Firms will invest to significantly upgrade processes in all areas currently underserved by technology, such as due diligence, value creation, and exit planning. If we look at areas still dominated by spreadsheets and other manual processes and consider which of these are especially inefficient, a number of candidates emerge for digitization. Chief among these is scenario planning and modeling – a vital process requiring significant time and resources. The use of both industry-specific solutions and enterprise software will become widespread, allowing firms to make more intelligent predictions and evaluate different scenarios in real-time for more powerful execution.

Prediction # 5: Rising LP Expectations

Today’s LP is already more sophisticated than ever before, both in terms of the way they access the asset class and the strategies they employ. In the year 2025, LPs will be even more discerning and will consider the timely availability of high-quality, granular data as a prerequisite for investing. LP due diligence will also include a deeper assessment and review of a GP’s approach to harnessing data and technology from a strategic perspective. In the same way that the Key Man Clause recognizes the importance of human expertise, experience, knowledge, contacts, and reputation; a Data Strategy Declaration, which outlines a firm’s approach to maintaining these same attributes in digital format, will be a common fixture in PPMs.

Private equity has always been a people business. It will continue to be a people business in 2025. That said, technology and the institutionalization of data and knowledge will play an increasingly integral role in leveraging human talent and experience to create a lasting, cumulative competitive advantage.

While past adoption of private equity technology, such as portfolio monitoring, was driven by innovation at the very largest firms before flowing down to smaller shops over time, the competitiveness of today’s market for both deals and LP commitments is driving innovation in all areas of the industry. Achieving success today requires thinking like a firm of 2025. Being a smaller fund in size is no longer an excuse to delay the adoption of technology. The sooner firms understand this shifting paradigm, the better placed they will be to adopt the right-thinking now to lock in future success.

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