Embracing the opportunity of digital change

More than ever, pri­vate equi­ty investors need to under­stand ful­ly where poten­tial invest­ments sit on their dig­i­tal jour­ney in order to sup­port and advise appro­pri­ate­ly. It almost goes with­out say­ing that, regard­less of sec­tor, all busi­ness­es will face a lev­el of dis­rup­tion at some stage. Is this a threat or an oppor­tu­ni­ty?

“From a pri­vate equi­ty per­spec­tive, under­stand­ing the dig­i­tal chal­lenge is real­ly no dif­fer­ent to any oth­er chal­lenge fac­ing a busi­ness on an evo­lu­tion­ary path,” says Men­no Antal, man­ag­ing part­ner and co-head of pri­vate equi­ty at 3i. “The key is to build dig­i­tal into your invest­ment strat­e­gy rather than rein­vent it. We spend time think­ing about how more tra­di­tion­al busi­ness mod­els can learn from more dig­i­tal­ly advanced ones and vice ver­sa – it’s mutu­al­ly ben­e­fi­cial.”

Mr Antal cites meet­ings held with con­tacts in Sil­i­con Val­ley to share ideas and best prac­tice. “We had a fas­ci­nat­ing dis­cus­sion recent­ly with Airbnb, for exam­ple. While they have come at the mar­ket from a dif­fer­ent angle to Aud­ley Trav­el, a leader in world­wide tai­lor-made hol­i­days and one of 3i’s port­fo­lio com­pa­nies, there were clear shared learn­ings, espe­cial­ly around the need to per­son­alise the cus­tomer expe­ri­ence,” he says.

“All trav­el busi­ness­es need to under­stand their cus­tomers bet­ter and by build­ing deep online rela­tion­ships with them, they will be able to tai­lor their offers more suc­cess­ful­ly, how­ev­er dig­i­tal­ly advanced their busi­ness mod­el.

From a pri­vate equi­ty per­spec­tive, under­stand­ing the dig­i­tal chal­lenge is real­ly no dif­fer­ent to any oth­er chal­lenge fac­ing a busi­ness on an evo­lu­tion­ary path

“Broad­ly speak­ing, we are see­ing a con­ver­gence of mod­ern and more tra­di­tion­al busi­ness mod­els across sec­tors.”

He ref­er­ences exam­ples from 3i’s port­fo­lio, includ­ing Aspen, a spe­cialised mini pump design­er, man­u­fac­tur­er and dis­trib­u­tor, which has devel­oped a new dig­i­tal sens­ing tech­nol­o­gy for its pumps, and GEKA, a mas­cara brush man­u­fac­tur­er, which has used 3D print­ing to make their new prod­uct devel­op­ment process more effi­cient.

Becoming a digital forerunner

There are two typ­i­cal approach­es for pri­vate equi­ty investors in the dig­i­tal space. The more famil­iar route is to tack­le the bur­geon­ing tech­nol­o­gy, “dig­i­tal-first” sec­tor. The oth­er, more untapped approach is in non-dig­i­tal com­pa­nies where dig­i­tal can be used to cre­ate val­ue.

A key oppor­tu­ni­ty for 3i, as a pri­vate equi­ty house focused on mid-mar­ket com­pa­nies across the con­sumer, busi­ness ser­vices and indus­tri­als sec­tors, lies in those mid-sized com­pa­nies that accept they face a dig­i­tal jour­ney, recog­nise they are at risk of being dis­rupt­ed, yet do not have the capa­bil­i­ty to trans­form by them­selves. “This is where I see a lot of val­ue being cre­at­ed by pri­vate equi­ty,” says Mr Antal.

The key is to build dig­i­tal into your invest­ment strat­e­gy rather than rein­vent it

And devis­ing and exe­cut­ing a dig­i­tal strat­e­gy goes beyond set­ting up e‑commerce plat­forms. Mike Tobin, a non-exec­u­tive direc­tor of sev­er­al com­pa­nies and for­mer chief exec­u­tive of Telecity, says: “A real dig­i­tal vision requires a com­plex and ever-chang­ing set of levers to equip a busi­ness to suc­ceed in the new dig­i­tal world, and the capa­bil­i­ty of the busi­ness to take advan­tage of them.

“It’s easy to say that ‘we have a dig­i­tal strat­e­gy as we have a great trans­ac­tion­al web­site’, but it’s so much more than that. You need a coher­ent omnichan­nel strat­e­gy, prod­uct and ser­vice inno­va­tion, digi­ti­sa­tion of work­flows, and improved real-time man­age­ment infor­ma­tion and sys­tems, to name a few.

“Suc­cess­ful­ly cre­at­ing and imple­ment­ing such a vision can be a chal­lenge, espe­cial­ly in a world that for the first time in his­to­ry not only looks to improve busi­ness mod­els con­stant­ly, but also to dis­rupt them active­ly. Yet it is essen­tial if you are to future-proof your busi­ness.”

Mr Antal explains: “At 3i, we con­tin­ue to devel­op our own dig­i­tal strat­e­gy and net­work. We con­stant­ly chal­lenge our­selves to think not only about big-pic­ture trends and themes, but also to take a gran­u­lar approach and con­sid­er the indi­vid­ual impact on sec­tors across our port­fo­lio, and what ‘good’ looks like in each.

“As well as bring­ing our port­fo­lio com­pa­nies togeth­er to share knowl­edge and expe­ri­ence, we also deep­en our own insight by learn­ing from indus­try lead­ers. For exam­ple, a recent team meet­ing was held at McLaren’s UK head offices to observe how they apply inno­v­a­tive tech­nol­o­gy to dri­ve improved per­for­mance across both prod­ucts and ser­vices.”

The cost of not address­ing dig­i­tal change is high. “As an investor, it’s imper­a­tive to be alive to these trends and recog­nise their impact. There are no sec­tors or com­pa­nies that we would look to invest in now with­out con­sid­er­ing the impact of dig­i­tal on the busi­ness,” Mr Antal con­cludes.

Becoming a digital forerunner