Leo magazine n°12
Union Investment: Why we chose Luxembourg
Financial services have become hyper-competitive: without innovation companies falter and private equity is no different. A sustainable digital transformation strategy is key to bringing about enhanced operational processes, efficiencies across the value chain and ultimately, accelerated growth for portfolio companies. We speak to Karin Erfurth, Project Management Director at EQT to get a sense of what is key for alternative investment firms as they execute their digital transformation strategy.
As more and more private equity firms embark on their transformation journey, they are looking to build out robust data strategies, scalable platforms, customer centric viewpoints, and frameworks that foster digital talent. As operations are being digitised, data management becomes all the more important to enable the above. Erfurth notes that the ability to comply with an increasing number of regulations, increasing investor interest in more extensive reporting (e.g. ESG related KPIs) and cybersecurity make it necessary for asset managers to speed up their digital transformation. Ensuring “inhouse and real time access to accurate data is the foundation to building efficient and scalable processes.”
It always needs to be a combined approach considering the people, the organisation, the processes, and the systems. All of these aspects need to go hand-in-hand to make a true transformation successful.
However, as with most things, it’s easier said than done. There are three key challenges, according to Erfurth, that private equity firms face when adopting new technologies, namely a lack of standardised processes, a certain friction in the technology and ways of working between asset managers and third-party service providers, such as quarterly accounting vs. the wish to access real time data, and a required shift in the mindset of people to adapt to new ways of working. “It always needs to be a combined approach considering the people, the organisation, the processes, and the systems. All of these aspects need to go hand-in-hand to make a true transformation successful” emphasises Erfurth. “To take everyone along on the journey, make sure not to lose talented people and that the organization is mature enough to value the new ways of working and to embrace them into the company culture takes more time than just introducing new tools.”
Digitalisation will impact the operations teams’ day to day as their focus will shift away from data collection as well as low variance processes that can be automated, and towards processes with higher variance and lower standardisation. That’s where the teams’ expert knowledge adds the most value.
In the past much of the focus has been on the back and middle office, where efficiencies of scale, in terms of digital transformation, can be gained. Increasingly, however, this focus is also shifting to the front office, to an enhanced investment selection and portfolio company development strategy. It is here that the robust data strategies and the value of data-powered decision making can shine, where a centralised data platform, a “golden source of truth” can lead to even better results.
Many firms have begun to embrace cloud-based platforms that centralise data and drive efficiency, in terms of cost and time. This centralisation or aggregation also brings with it the increased possibility of providing real-time insights and sophisticated analyses, adding value in the decision-making process and building the foundation for the automation of non-value added tasks.
EQT has gone one step further in this respect, creating Motherbrain; a platform that leverages data and machine learning. Solutions, such as Motherbrain, crunch, find, and analyse digital patterns across enormous amounts of company, people, market, and consumer data from multiple sources, to identify industry trends and provide recommendations for new deals to front office staff. Erfurth highlights that “some of EQT Ventures’ best performing investments were sourced using the Motherbrain platform.”
What started as an ad hoc activity following the initial impact of Covid has since grown into a full digital support concept for portfolio companies, including dedicated EQT digital relationship leads.
Alongside the drive to bring new technology into operations, digitalisation can significantly increase the transparency, security and availability of information to investors. Online communication platforms, such as the EQT Investor Portal, where EQT’s fund investors receive account statements, drawdown notices and other investment related information in a secure and centralised place, are replacing emails entirely. Covid also put an emphasis on the ability to perform fundraising in a digital way.
Besides their investors, private equity firms put a strong focus on the development of their portfolio companies. Helping them to adapt to the right technologies is a key priority. This has been further enhanced by Covid. In this respect, within days of switching to remote working, EQT reached out to the portfolio companies and offered them support with best practices around remote ways of working, virtual training sessions and technology recommendations to help them to maximise online collaboration and productivity of their workforce as well as to increase cybersecurity. “What started as an ad hoc activity following the initial impact of Covid has since grown into a full digital support concept for portfolio companies, including dedicated EQT digital relationship leads with ongoing dialogue with the portfolio companies to discuss digital strategy and value creation opportunities” Erfurth notes. This has since morphed into ensuring these companies develop their expertise for digital capabilities and incorporate new technologies into their day-to-day work.
Bringing data in-house and having a proper data management strategy is only the first step, next in line is the automation of standardised processes based on this data. This will allow teams to spend less time on labour-intensive low value tasks and spend more time on value adding activities. Erfurth highlights that they are already looking into “the automation of payment instructions and treasury functions, as well as implementing more digital authentication methods” as further examples how digitalisation can support scaling and efficiency.
Covid has accelerated this digital transformation and broadened its scope as it lowers the threshold for virtually gathering important stakeholders and increases the acceptance of digital tools in general. Digital investor meetings and team events are also becoming the new “normal”.
Everything can always be improved… This is one of EQT’s key mission statements. The goal is to make EQT a smarter investor, owner and seller and to future-proof all portfolio companies by making them digital leaders in their industries.
Erfurth espouses that “everything can always be improved… This is one of EQT’s key mission statements. The goal is to make EQT a smarter investor, owner and seller and to future-proof all portfolio companies by making them digital leaders in their industries.” Given the growing industry competition, those private equity firms that are set up to succeed in the coming years are those that are able to harness the value of data management and the new technologies to remain top performers and provide stakeholders with the best digitally-enabled solutions.