Digital transformation is high on the agenda of companies across the world and across all industries lately – from healthcare to manufacturing, software, and retail – generating significant media coverage.

This is a moment of high hopes and great enthusiasm for digital transformation in the business world, and the financial services space specifically, and it has never been clearer than with the advent of covid-19.

Countless news stories have appeared of societal changes happening nearly overnight. Businesses have scrambled to respond effectively, and to keep their customers’ trust in a new and volatile social moment.

Why the buzz?

Even before the pandemic, technology was a hot topic, though the spread of the novel coronavirus accelerated innovative adoption immensely, forcing companies to deliver digital initiatives. In particular, digitalisation holds tremendous potential for value creation, with private equity being an area that could benefit in particular, gaining an edge in a hyper-competitive market.

Obviously, advanced technology companies are the ones that can be more alluring to private equity industry. The digitally transformed companies could bring significant opportunities to them, such as revenue and earnings growth. This ensures a higher selling price for the company, which improves private equity returns on investment.

Thus, there is this buzz going on around digital transformation, which makes private equity firms identify innovative and effective investment angles of businesses in order to in order to create value.

Value creation has never been more important, which means that firms have to find new ways to create operational efficiency, and increase internal value, accelerating digital transformation processes for their own long-term growth, and profitability. They need to understand and recognize the changes that technological advances are bringing to the global marketplace, and the opportunities that such changes are creating.

Undoubtedly, early and successful adopters of new technologies are often able to gain advantages that enable them to establish new ground in a market before the technology becomes more widely used, a more standard feature within the market.

Challenges

Digitalisation has great scope for value creation, but the challenge for investors is to discover and quantify this potential opportunity. The crucial part for private equity firms comes when they need to assess and develop a company’s digital capabilities.

To judge a company’s position and prospects, an investor has to know where the company and its competitors stand in terms of digital maturity. That means that private equity firms have to recognise whether these companies can make the digital shift, and commit to the information management, advanced analytics skills, and technology investments that come with a successful digital transformation.

Investors who have digitalisation as part of the due diligence process are going to be the winners and the ones who do digital transformation value creation efficiently. Those that don’t are very likely to miss opportunities, and be positioned at great risk.

Potential solutions

Assessing a company’s digital capabilities, and developing them to their full potential may require firms to build out their own digital expertise or align with strategic partners. In doing so, investors will be better positioned to pick the right targets, avoid potential losses, maximise their portfolios’ value, and have greater success with preparing companies for the future.

Timing can prove to be a breaking point too, since historically many private equity firms have waited too long after acquisition to get involved in operations on the digital side.

When it comes to digital transformation, prompt action is key, as the sooner things are running smoothly, the more time you have to create value. The right ecosystem components should be chosen during due diligence and companies should be ready to implement the new systems from day one.