Private equity firms and the portfolio companies they manage need to do more than use technology as a way to reduce costs and increase efficiencies.
It is now undeniable that technology plays a pivotal role in shaping the value and success of PE firms’ portfolio companies. Technology has transformed from being a cog that drives operational efficiency to a powerful tool that propels revenue. The stage in which this transformation takes place has also changed dramatically. Now, we are operating in a macroeconomic environment that is fraught with dangers, geopolitical conflict, economic risks, and the lingering effects of the pandemic.
In this turbulent environment, harnessing innovation and technology is more than a choice; it’s an urgent necessity. This is what can help their portfolio companies to survive the storms of change. Three vital technology-driven pillars are the key to unlocking value: boosting top-line revenue, optimizing costs, and maximizing capital efficiency. Each pillar, individually and collectively, strengthens the foundation and amplifies exit multiples.
Continue reading to learn more about the value that finance creates for the private equity portfolio monitoring.
How does a Finance Company Create Value for Private Equity Investors?
In several ways, the finance function plays a crucial role in private equity value creation:
- Refocus your Operating Model on Value
Finance functions need to keep up with the rapid changes in business operating models if they are to be able to support their business and add value. When CFOs think about the business operating model they use, they focus on shared services, location options for teams, and how much they can outsource.
Automation is one way to reduce the cost of finance functions. It can be a simple project, as many people believe. Automation and robotics can replace much time spent on finance and accounting activities, such as error correction and rework. Portfolio companies can quickly implement these solutions at low costs thanks to FaaS, web-based analytics tools, and RPA (robotic process automation). This can transform how finance functions work and add value to the business.
The finance leaders ask themselves if their teams could perform specific tasks more efficiently or if they even need to do them. They then determine which tasks do not add value to the business or differentiate it and eliminate them.
- Performance Reporting and Measurement
The management team and investors can track the progress of the company against its targets by establishing key performance indicators and implementing robust report systems. Transparency facilitates decision-making and allows for course corrections if needed.
- Utilizing Technology
Technology is essential to the transformation of almost all finance functions (and businesses in general). The emergence of new tech platforms, tools, and resources (such as RPA), Artificial Intelligence, Big Data cloud computing, etc.) has led to a shift in the way we do business. Transformations can deliver more significant benefits than ever before. Global organizations consider robotics, AI, and the Internet of Things to be the technologies most critical for cost-cutting and disruption.
If chosen and implemented correctly, technology solutions can give finance departments more time to focus on delivering value. FaaS platforms, for example, can be used as a single information source and streamline processes with their effective governance and standard data definitions. Accounting costs are lower for companies that have a single system across the enterprise. Data visualization tools and add-ons allow self-service reporting, and they can frame opportunities and challenges differently.
- Financial Planning and Analysis
The finance team assists in the development of strategic financial plans and projections that guide decision-making and allocation of resources. They can optimize resource usage by analyzing the market, internal capabilities, and competitive landscape.
- Breaking Away from the Traditional F&A Model
To make the finance function of your portfolio company a valuable asset, you must depart from the traditional accounting and finance model. This requires a new way to measure the performance of your company. It is essential to focus on increasing the value of your company. Understanding why finance functions are in opposition to value creation is crucial for a successful transition.
The financial function of your company can help you focus on the things that matter most to economic performance. It is essential to look beyond the financial statements because the value that you create never appears on your Balance Sheet. To create value, it is vital to think about innovative marketing, IT (such as AI, automation, and financial analytics), and human capital. Another crucial step is to balance the financial and non-financial measures. Portfolio companies should research their strengths, weaknesses, and the non-financial components that contribute to value creation. By integrating disparate systems, the intellectual capital of a company can be leveraged.
- Exit Strategy Planning
The finance team works with the management to create an exit strategy that is aligned with the investors’ goals. They prepare the company to exit successfully, whether through a secondary buyout or IPO. This is done by enhancing financial performance and positioning the company attractively for potential investors or buyers.
Conclusion
PE firms must do more to remain competitive, as the private equity career path has grown significantly over the past decade. To stay competitive, they need to be able to make informed decisions and understand the regulations. However, this is only possible if the finance staff are trained and have the necessary tools. To make the right decisions, a fund manager needs to have a comprehensive understanding of the financial status of the company at any given time.
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