Intelligent Automation: Private Equity’s Key to Hidden Alpha

By Michael Judd

The money is in the data. PE firms have long known this to be true. Over the next 15 years, as we continue to speed forward with exponential increases in data generation and collection, PE firms and portfolio companies committed to digital transformation stand to gain unprecedented levels of market value. Investment strategy firm, Ark Invest, estimates that AI will create $17 Trillion in market capitalization by 20361

Intelligent automation through the use of Artificial intelligence (AI), machine learning (ML) and deep learning (DL) are typically viewed as providing the pathways to saving money through streamlining operations. But automation can provide a powerful platform to generate value through more efficient data collection and speedier analytics. Forward looking PE firms are using the power of automation to create truly differentiating value propositions for themselves and their portfolio companies.

Becoming More Attractive to Sellers

Portfolio prospect companies have more choice than ever when considering taking an investment. The value a PE firm can bring in operational and business insight is in many respects just as important as the cash. For many portfolio companies, a leading benefit in addition to financing from a PE firm, is the access to the accumulated learning from other portfolio companies, intelligent business consulting, best practices, and growth hacking strategies from the PE firm through more effective decision-making. 

A push to digital transformation with automation at the center gives PE firms a platform that can lead to a host of benefits for the PE firm itself as well as vastly increase the efficiency and market value of portfolio companies. 

Intelligent Automation as an Acquisition Advantage

It is practically commonplace to view the typical benefits of automation to increase efficiencies through enhanced business processes. Streamlining data entry, improving forecasting and planning, and generating more timely financial reports are table stakes for virtually any company today.

Intelligent automation can also support broader transformation goals. In the case of traditional labor-intensive businesses for instance, automating customer and employee workflows can unlock a wealth of data and analytics to increase the speed of decision-making, improve net margins, and increase market value. In addition, traditional businesses that move into the realm of AI have the added benefit of yielding vastly higher valuation multiples. PE firms can then use more of their valuable time to focus on acquisitions that are lower margin and value within the same space— and quickly scale them with AI-managed workflows. 

PE firms that develop an acquisition strategy coupled with an intelligent workflow capability will have a distinct competitive advantage, win more deals, and realize higher margins. Similar to businesses during the industrial revolution, those that adopted assembly line efficiencies gained a massive advantage over their competitors.

The Portfolio Management Advantage

PE firms positioned to differentiate themselves and promote growth within their portfolio companies must get data from all of their portfolio companies into a central data repository. This alone is a task in operational discipline as portfolio companies likely use multiple or in some cases disparate systems. Automation opens the door to the centralization of critical information. Using Intelligent Automation to gather and analyze portfolio company data from financial, sales, marketing, supply chain, human capital, technology, and others, speeds decision making and value creation.

Greater Wins Come From Playing Smart

The ability to quickly and accurately assess target opportunities is more necessary than ever. Many traditional labor-intensive businesses could very well be diamonds in the rough that could have their potential value unlocked with intelligent automation. Thus a strong automation strategy can be an effective tool for selecting target companies. By consolidating and upgrading these companies onto a common AI platform, PE firms can rapidly increase their portfolio value.

The competition is stiff. Fast, accurate data, can give your firm an advantage over less equipped competitors. Automation can rapidly correlate complex data sets from your existing portfolio companies, and previous successful and unsuccessful deal analyses, combined with data from the portfolio target. This ability to more quickly and accurately assess the opportunity with your proprietary data and analysis increases in power as you collect more data from portfolio and prospect companies, creating an evolving competitive advantage.

Intelligent Automation Leads to Wiser Investments

Disbursement of capital to cover the most reasonable number of opportunities needs to be balanced with the PE firm's growth strategies. Spreading bets over too many or too few companies in a portfolio can have a significant impact on stalling or speeding growth. Investing in automation and machine learning to help establish and model the key metrics promises to not only improve the efficient deployment of assets but also increase the capacity to help those portfolio companies grow. 

Automation can also overcome the drawbacks of successfully growing the PE firm’s portfolio. Adding to the portfolio leads to an increased burden on internal resources in addition to an increased volume of information coming in from portfolio companies. Automating the process for data entry, the collection of data across multiple siloed sources, and the correlation of data across the portfolio can result in a reduction of complexity and near real time insight into the portfolio. 

The money is in the data and intelligent workflows. As more acquisition target companies are coming to the table with data as a key value proposition, PE firms need a greater capacity to ingest, analyze and spin that data into an asset that is much more valuable than if it were to remain isolated in the selling company. Automation can play a significant role in determining the value of the prospective company and makes the collection and correlation of widespread portfolio data a powerful and proprietary benefit—ultimately leading to greater efficiencies and value for the firm and its portfolio companies.

Where to Start?

PE firms of all sizes have three primary opportunities to unlock value through intelligent automation:

  1. Integrate intelligent automation into the deal review process. I put this first on the list because it is a quick win. Set an acquisition strategy and invest in evaluating new deals with an intelligent automation lens. Labor-intensive tasks can be quickly evaluated for automation. Customer interactions can be evaluated for experience automation through self-service. It starts with a solid strategy.

  2. Evaluate each portfolio company for automation and its related ROI. Portfolio companies should go through a similar review and journey mapping exercise. Then apply agile processes to create an intelligent automation solution. We see our clients reduce labor by as much as 80 percent by going through a mapping process and building an automation solution. The key is to adopt an agile, microarchitecture that pulls data from key systems and integrates leading technologies through intelligent workflows.

  3. Integrate portfolio data into a central intelligence platform. I put this last only because the information gleaned in the steps above must be accessible and useful for portfolio management. This is the layer that helps to unlock the full potential of the assets under management.

The key is to start adopting intelligent automation practices into your portfolio. The value will flow most heavily to those firms that invest in AI capabilities and build their portfolios around them. Most middle-market companies are underinvested in technology, therefore these capabilities will be a game-changer for them. In most cases, the challenge lies in the business leaders’ lack of understanding and the team’s hesitancy or reluctance to take advantage of this disruptive technology. There is no doubt that many PE firms will realize multiples in their portfolios by introducing AI technology to the SMB market. Will you be one of them?

About Originate 

Since 2007, Originate has been a premier digital innovation company composed of seasoned entrepreneurs and top software engineers. From startups & private equity firms to the world’s largest enterprises, Originate accelerates businesses with a value-driven approach to experience automation and AI. 

Drop us a note to learn more about how Originate can help build your intelligent future. 

  1. https://ark-invest.com/big-ideas-2021/