Private equity industry need to keep up with digitisation: PwC study

January 8, 2018

More than 80 per cent of PE houses believe that digitisation is critical for making their portfolio companies ‘future ready’

Private Equity houses need to keep up with the digital revolution engulfing the Middle East and more than 80 per cent of PE houses believe that digitisation is critical for making their portfolio companies ‘future ready’, according to a recent study by global audit and assurance, tax and consulting service firm PwC.

As part of the study, PwC Middle East surveyed a number of leading PE firms in the region to find out what digitisation means to them and how it’s impacting their investment decisions. According to the study, at a corporate level, digital has disrupted almost every industry sector, and will continue to do so. As the digital landscape evolves, there is a pressing need for private equity (PE) houses in the Middle East to keep up with these rapid changes, or risk being left behind. The PE investment horizon means that the digital transformation of a portfolio company is being assessed and planned even before PE houses even think about investing in any new company.

Private equity companies are found to be generally cautious about their initial investment decisions and they are unlikely to be early adopters of the latest technologies.

“Digitisation is not something that can simply be solely imposed by private-equity investors,” said Erwan Colder, PwC Partner and Middle East Private Equity Leader. “Rather, digitally enhancing portfolio companies depends on the actions and attitudes of wider stakeholders including the Board and management, and on how easy it is to change customers’ mind set.”

According to the PwC study, the Middle East region is fast embracing the digital revolution, thanks to the dominant young demographics and good quality infrastructure. At a consumer level, there is a high level of technology adoption in countries such as Bahrain, Kuwait and the UAE that are considered the most penetrated countries in the world with a mobile subscriber rate of over 90 per cent. However, at the corporate level, the study notes that companies are still in the process of adoption in comparison to the West when it comes to digitisation.

PwC Middle East’s survey shows that PE houses believe that going digital is a necessity, it features heavily in the investment decision process and the value-creation plans. Notably, 80 per cent of PE houses said that digitisation is critical for making their companies ‘future ready’, compared to 62 per cent of their European counterparts stating that digital could deliver ‘sustainable value’ for companies and is considered as the single most important trend influencing investment decisions.

Increasingly, digitisation is becoming a key factor in due diligence and valuation of companies by PE firms. The study showed 75 per cent of PE houses are now focused on the digital maturity of a company at the due diligence stage of their acquisition.

According to PwC Middle East’s survey findings, digitisation means different things to different PE houses. Some see it as an enabler to maximise revenues within a fairly short time frame, others see it as a way to improve management reporting, with better quality data feeding better informed decision making. Around 70 per cent of the respondents say that digital can reduce operating expenses.

While some PE houses seem cautious, digital transformation is front of mind for Governments across the region, with many national programmes launched to improve and develop countries’ digital infrastructure and economy, Clearly the digital revolution is changing the way products and services are consumed. As the market continues to adapt to consumer demand, private equity firms and portfolio companies must remain relevant by mirroring consumer behaviour.

“Having a digital strategy is essential for ‘future proofing’ a company that wants to retain market share and stay ahead of the competition. Those who are nimble will reap the benefits of the value to be created through digitisation,” said Colder.