Digital deployment
The authors find that, compared with peer businesses, companies that receive PE backing subsequently experience a significant boost in digital investments, with IT budgets increasing by 13.9% on average following a deal. The paper also finds a rise in the number and proportion of job postings that require digital-related skills, reflecting greater hiring for technology roles after an investment.
These findings are not limited to companies in the tech sector. The authors observe an increase in technology adoption across a broad range of industries, suggesting that PE firms are promoting digital transformation in more traditional businesses. The positive effects on IT budgets and digital job postings were especially strong among industries with greater potential for artificial intelligence (AI) to perform tasks.
“At the outset, we hypothesised that PE-backed firms might increase technology investments post-acquisition,” says Brian Baik, another of the paper’s authors. “But we were unsure about the magnitude and whether certain factors – such as investor expertise or sectoral exposure – would play a decisive role. One surprising finding was how pronounced the effect was, particularly in industries highly exposed to AI.”
But we were unsure about the magnitude and whether certain factors – such as investor expertise or sectoral exposure – would play a decisive role. One surprising finding was how pronounced the effect was, particularly in industries highly exposed to AI.
Brian Baik
The authors also find stronger effects for fund managers with experience of investing in technology, including those who have previously invested in IT companies or have digital or data-related expertise. This echoes the experience of PE firms, many of which have built in-house capabilities to support digitalisation among portfolio companies. Graphite Capital is one such firm, as managing partner Markus Golser explains. “We have invested in our value creation team by bringing in people who live and breathe technology and digitalisation on a daily basis,” he says. “This provides our portfolio companies with internal experience.” He notes that almost all M&A processes now involve extensive technology due diligence to review technology risks and opportunities.
Alex Mathers, a partner in the value acceleration team at Inflexion, adds that “investment in systems and digitalisation [is often] part of the investment thesis to help a company transition into the next phase of its development.”