How Digital Disruptors Are Changing Private Equity

As technology advances, so, too, must the industries that use it. Over the past decade, digital disruption has been a given – the most obvious example is Amazon completely turning the retail and e-commerce spaces on their heads. For many industries, it’s a foregone conclusion that innovation is going to happen – but what does this mean for private equity players? The answer isn’t so simple.

There is an enormous competitive advantage when you correctly predict whether new investments will benefit from – or be disadvantaged by – digital disruption. Consider Blockbuster Video, which was once seen as a solid investment with great cash flow, but now lives on only as an example of a company that was blindsided by Netflix. The investors that came out on top in this scenario did so by forecasting the future of content dissemination.

Yet the private equity model of buying, transforming, and either selling or going public usually happens in a short three- to five-year window, with little spare cash to throw at any unforeseen challenges that arise. Without some foresight, it’s very easy for a surefire investment to become the next Blockbuster – but with the right strategy, firms can take advantage of digital disruption, rather than be defeated by it.

The key, as a PE firm, is to find the technological inefficiencies in any investment and use digital techniques to eliminate them, by:

• Using data to make informed decisions;
• Creating an emphasis on cybersecurity;
• Understanding consumers and engaging with them through digital methods;
• Improving a business model through data analytics, artificial intelligence and machine learning; and
• Not just forecasting, but also “backcasting”: Start with the final goal, and work backward through clear and decisive transformation mapping, with goals along the way that gather incremental value.

This is where your IT transition team turns into your most valuable asset. As an investor, it’s important to work with consulting partners who have their hands in many industries and can reference the trends they’ve seen to guide a firm in its investment thesis. A tech team with cross-industry experience is going to be the first one to know: “If it happened in X, it’s going to happen in Y, and here’s how you stay ahead of it.”

And it’s no longer if, but when. What happened with Blockbuster and Netflix is happening elsewhere, and examples abound: Food delivery services like GrubHub and payments companies like Paypal are changing the very foundations of the restaurant and banking industries, respectively. That means that even industry mainstays must always be on the lookout for change.

As technology continues to improve at breakneck speeds, PE firms must now view digital transformation as a new opportunity for value creation – yet also as an imminent threat to legacy business models, and even to the industries themselves. It will be the private equity firms with vision who find the new digital players and, with their consulting partners, build them up to reach their fullest potential.

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