Relations between PEs and companies specializing in technology have multiple edges and complexities.
According to S&P Global Market Intelligence, in the investment business, technology companies beat those of any other sector in terms of funds received by PEs, according to S&P Global Market Intelligence. In 2020, for example, the total value received by companies in the healthcare sector increased six-fold. This sector took second place.
The trend is not a coincidence. Companies in all industries –particularly companies in the middle sector with many years in the market– are making progress with digital transformation processes, initiatives to modernize old heritage systems, and strategies to extract value from the data accumulated over the years. Companies specializing in the new technologies increase their relevance and importance as perceived in the market.
Toward the data-driven model
The pandemic accelerated the incorporation of innovative tools. But, as a result of the restrictions on mobility and confinement experienced in large parts of the world, the pandemic also exposed the weaknesses of the supply chain, compliance, and customer service, among other areas. In most cases, the problem could be solved by new technologies, such as automation (to decrease human intervention in processes); the internet of things (to monitor assets remotely and act accordingly); cloud computing (so that critical data are accessible from any place and at any time); or artificial intelligence (to anticipate scenarios), to mention the most relevant.
Hence, the second line of links between PEs and technology partners is essential. The latter can help companies about to receive investment or which have just received it reach a new level in efficiency, productivity, and competitiveness. The result will be cost optimization, elimination of unnecessary expenses, and new ways to generate income. In other words, technology partners focus on PE’s main goal: increasing the market value of the companies in their portfolio.
It is not only that. The right technology partner can reach beyond and help a traditional company become a data-driven company. In these companies, decisions are made exclusively based on data –concepts like “intuition” or “we have always done things this way” lose strength. Decisions are centered on the client experience so that products and services are related to the digital lifestyle of the new consumer. Companies in any sector today can offer added value through new technologies. In that sense, Pitchbook’s edition corresponding to the third quarter, 2021, points to an increase in the interest in all the activities related to the new “service-oriented world.”
The first step to change the model is a diagnosis of the current situation: prior research that at Making Sense we call “discovery” and is an essential part of all the projects we undertake with our partners. The discovery process involves the work of experts in technology, business, and design who will develop the business with a forward-looking approach. Clients contribute their market experience; PEs offer their insights and information about sector trends or other industry trends that might affect it; technology experts contribute their knowledge about data tools and use cases.
In turn, for the technology partner, working with a PE is an attractive challenge. As opposed to companies with a conservative focus, in these cases, companies lean toward major, genuinely transformative projects. Marginal innovation initiatives are usually set aside because they do not significantly improve performance, which goes against the PE’s goals. Of course, metrics play a crucial role. For the PE, it is essential to have an accurate detail of the value obtained with each technology project.
As we pointed out initially, the relations between PEs and companies specialized in technology have multiple edges and various complexities. However, in every case where a good link is established, the result is the same: a strong synergy and huge profits.