A growth driver
A natural follow-up question is whether digitalisation has translated into improved performance. The paper finds positive associations with growth, innovation and, ultimately, PE fund returns where portfolio companies recorded increased investment in technology after PE backing.
“Portfolio companies that increased their IT budgets experienced faster sales and employee growth,” says Baik. “Specifically, IT budget increases were associated with higher revenue and workforce expansion over a two-year period post-investment. Companies that increased hiring for AI and machine learning roles were more likely to obtain new patents, suggesting that digital investments also contributed to innovation.”
These findings align with practitioners’ first-hand accounts of digital efficiencies among portfolio companies. Inflexion, for example, has overseen one portfolio company’s adoption of robotic process automation. This has enabled the business to automate administrative tasks that are not client-facing, freeing up staff to spend more time engaging directly with customers.
“We think about how to use technology to grow a business faster and create the foundation that will underpin that growth,” says Mathers.
Technology drives efficiency, but it is not about cutting the headcount. It allows businesses to redeploy teams into high-value tasks where human interaction is the differentiator.
Alex Mathers
Meanwhile, Golser makes a distinction between “defensive” and “offensive” work when investing in digitalisation. “Defensive work involves bringing existing system environments up to scratch, where we have to implement new systems that allow modern workflows and processes to function,” he says. “Offensive work focuses on building commercial value in a business by using technology to enhance the customer proposition.”
The research findings on the effect of digital strategies on returns chime with Haresh Vazirani, senior investment director at Patria Investments, global private markets division. He says that, when done effectively, investments in digitalisation are reflected in a portfolio company’s valuation on exit. “A well-invested company with a good product, robust digital infrastructure and a good cybersecurity solution, for example, could trade at a much higher price than a company that is still trying to figure that all out,” he explains.