Innovation in Focus: Private Equity and Institutional Actors

Innovation in Focus: Private Equity and Institutional Actors
By: Itai Green

Private equity funds invest in many traditional companies. So do institutional actors. When asked, leading voices in this field often claim that they are not looking for the next big thing, but dominant companies in the field, with low risk and a relatively predictable and stable cash flow.

These funds acquire companies that belong to traditional and, in many cases, outdated industries. The funds work to streamline the companies, often through dismissing employees and/or replacing the management, in a way that will significantly increase the company’s value, make it more efficient and allow it to be sold at a profit.

For the most part, funds pay too little attention to innovation and technology – a critical element in companies’ future potential improvement. By implementing new technologies such as robotics and artificial intelligence, significant value can be brought to portfolio companies.

When a fund invests in a traditional company, does it invest enough managerial and financial resources in examining how the company can be improved by implementing advanced technologies that will lead to increased market share, performance and profitability? Unfortunately, the answer is usually no.

These funds’ success is determined by their ability to quickly gain exponential value before the selling of the companies, usually within about three to five years after the acquisition. For many industries, innovation, technology, and digital transformation can be a springboard that will lead to rapid improvements.

In order to best improve their investments, the funds must make strategic improvements in the companies in which the fund is invested in. Of all the possible organizational and operational changes, technology is the most critical.

Technology has been an essential aspect in the past, and in the reality created by the Coronavirus, it is more critical than ever. With that said, the Coronavirus is just the beginning: in many ways, the crisis has simply accelerated inevitable processes that were already in full swing. Many technologies such as robotics and artificial intelligence began to become a necessity even before the epidemic, and long after the current crisis will be over, technology will continue to be a disruptive force in industries, which will create new business models. It is important to understand that what was, is not what will be, and private equity funds need to understand that funds will have a difficult time producing a return on their investments in the future without investments in these areas.

To generate or maintain an advantage, funds must examine various types of technological changes in the companies in which they are going to invest. In particular, they should use technology to improve their digital footprint, performance, data usage and customer experience.

According to a 2019 report published by West Monroe, only 42% of surveyed funds reported that they have digital standards to make decisions, while 40% indicated that half of their investment portfolio or less has a digital strategy. That is simply too little, and it will have to change.

According to a KPMG report, investments in technology were significant in 2020, mainly due to the Coronavirus, while the firm predicts that companies’ ability to apply digitization to business models will have greater economic significance in the near future.

Private equity funds are expected to increase the efficiency and revenues and increase the profits of portfolio companies due to the assimilation of innovation and technology. The funds will enrich their technological toolbox, from examining potential investments through close supervision as directors in the portfolio companies.

Like company directors, fund managers need to develop both skills and knowledge on the subject, as technological and digital literacy are acute to their investments’ success. While equity funds excel at identifying companies with potential for future profits, implementing a digital transformation requires skilled teams that can help investors and companies meet these goals. The same is true for institutional investors who will be reluctant to invest in companies whose implementation of innovation is not part of their strategy.

Funds must build capabilities and tools for managing the implementation of technologies, where the principle guiding the funds should be finding technological inefficiency in every investment. Funds should make proper use of existing technologies to correct these inefficiencies, often through intelligent use of data in decision-making processes, as well as through artificial intelligence and machine learning, improving the business’ ability to understand consumers and communicate with them and improve their experience and more.

This is precisely where Open Innovation should come in. Cooperation with other actors in excellent technological ecosystems will allow companies to succeed and do so quickly. The funds can and should encourage company managers to collaborate with startups to produce a quick and significant value relevant to the new reality.

About the Author

Itai Green is the founder and CEO of Innovate Israel. He is one of the dominant leaders of Israel’s corporate open innovation. Itai is recognised as a leading player in Israel’s startup ecosystem and is at the forefront of launching its growth at a rapid pace. Itai leads innovation processes by connecting global corporations with the Israeli startup community to create advanced technological solutions; focusing on IT, consumer products, pharma, finance, travel, e-commerce, retail, banking, insurance, energy, construction tech and IoT. Itai is a member in several startup advisory boards. In the past, Itai was head of business development and Innovation at Amadeus IT Group in Israel, amongst other prominent positions at Elbit, CEO at Maxtech Technologies, VP Business Development at Techtium and the co-founder of JerusalemOnline. Itai is the founder of the ITTS community (Israel Travel Tech Startups). ITTS houses 350 Israeli traveltech entrepreneurs and strengthens the internal collaboration between startups, as well as increases the level of engagement between startups, multinationals and investors. Itai has also created the IITS community (Israel Insurance Tech Startups) for the Insurance start-up sector.

Email: [email protected]

LinkedIn

Featured image via Unsplash

Be the first to comment

Leave a Reply

Your email address will not be published.


*