There is much overlap between the issues faced by operating partners working with portfolio companies and CFOs at private equity firms.
Indeed, the roles are increasingly merging. Can anyone name a PE fund CFO that has not leant their expertise to portfolio companies on capital structures or management incentive programmes? If a mega firm hires a head of talent, you can be pretty sure their skills will be called on both by their own partnership and its portfolio companies.
At Private Equity International’s Operating Partners Forum: Europe 2019, there were some clear lessons with application to private equity firm CFOs.
Pricing strategy, for example, provides an opportunity for value creation that is too often overlooked but has the potential to deliver the most return on investment, said Mark Billige, managing partner at consulting firm Simon-Kucher & Partners. It gets overlooked because, suggested Billige, either management teams see it as too technical or complicated, because it seems somehow anti-customer, or because it is simply too much of an expensive exercise to start with.
One could argue that private equity firms are already savvy price strategists. PE firms have a relatively small number of clients to cater to, making it easy to blend fee breaks, co-investment rights and separate account terms to cater to individual investors and get capital raised. As and when retail capital becomes a more important component of the investor base – and the number of individual clients goes up – perhaps pricing strategy will come to the fore.
But it was the area of robotic process automation (RPA) – and the almost unfathomable effect it is going to have on operational efficiency – that should be most of interest to CFOs. Keynote speaker Anubhav Saxena from RPA provider Automation Anywhere talked through an example of how a knowledge worker gets replaced by a software robot.
At a conference for operators acting across all portfolio company business areas, it was a finance function role that he chose as his example. This is because the type of bread-and-butter work that requires taking data from one format and transferring it to another (say, from an invoice PDF to a spreadsheet) is exactly the sort of thing a robot can be taught to do.
As Carlyle Group operating executive Georgette Kiser, who used to be the mega firm’s chief information officer, noted in an onstage interview, large private equity firms are making the same use of emerging technology in their own operations as they are encouraging their portfolio companies to do. Automation will not just benefit firms with giant operations. We have spoken to several small, lean firms who see RPA as the perfect technology to keep themselves exactly that – small and lean – even as they scale up their assets under management.
CFOs could either be scared or excited. I’d argue it should be the latter.
Watch out for our definitive report coming soon into how robots – in the form of both RPA and artificial intelligence – are changing private equity firms’ operations forever.
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