Tech is the New Two-Way Street Between PE and Portfolio Companies

Segmenting companies based on the nature of their software technology use provides clarity as to the nature of their business. When Private Equity companies embark on a path to make technology investments the central theme, this segmentation is very useful. We can broadly identify these segments as: 

• Companies whose business itself is software, also known as ISV (Independent Software Companies) 
• Digital Natives whose business model is based on software 
• Enterprises that want to transform with software or transform into a software company 

This write-up is about Private Equity (PE) Firms, especially those that invest in three kinds of portfolio companies: ISVs and similar companies building software, digital-first companies, and enterprises. However, there are two other important stakeholders I would like to address today. This write-up is incomplete if we don’t consider partners and service providers whose purpose is to create digital leaders. Being an investor myself and having enough exposure in the Venture Capital (VC) or PE marketplace, I am convinced about the role Xebia can play in the private equity ecosystem by providing a 360-degree view of value creation. 

There are strategies to enhance the shareholder value that the PE firms are capable of, and there are tools and expertise that the niche service providers possess. So, bridging those capabilities is the recipe that I think will make a significant difference in the crowded marketplace. 

Sharpen the digital tools to achieve efficiency 

Digital adoption and transformation are slated to be solutions for operational efficiency and scaling up. However, these efforts are hardly analyzed or understood in terms of supporting and enhancing relationships between companies, especially PE Firms and their portfolio companies.  

As PE Firms encourage incorporating digital tools in portfolio companies for strategic advantage, the companies embark on a path of continuous innovation with reduced technical debt and better alignment with markets.  

The digital tools may be products, platforms, coding assistants, plugins, or cloud solutions.  

Indirect technology guidance and advisory from PE Firms can digitally transform a portfolio company and help it achieve the required growth rate. However, such growth is better achieved with a solid partner than the PE firm attempting to reinvent everything themselves. 

Read also: "Leveraging Technology as a Strategic Value Creation Partner for Private Equity Firms"

What are the common areas of interest between the PE and its portfolio companies? 

• Market Expansion: In a world where the digital drive is bridging the geographical divide, it should be possible to connect resources, markets, and opportunities for a product or a service beyond the boundaries of a region. This will also provide better cost arbitrage, healthier market access, and global opportunities. 
• Revenue Expansion: There is a saying: “If you do what you did yesterday, you will not even get what you got yesterday.” Companies must be agile in ever-changing market dynamics to explore the art of opportunities. Recognizing the products or services, striving to disrupt and not be disrupted, continuously innovating, and staying ahead of the trends are both necessary and sufficient conditions for revenue expansion. 
• Margin Expansion: How to do more with less? Less costs, more profits, less overhead, more agility, this list could go on. The willingness to expand margins is a drive that companies adopt to enhance shareholder value. 
  

How do the collaborations help? 

As shown in the infographic above, the collaborations provide solutions that help PE Firms implement critical decisions related to investments and exit strategies. Once the firms calculate risks and assess potential investments, digital modernization and transformation initiatives make it possible to implement the next steps. They also aid in portfolio rationalization. With such smart tools, PE Firms can do a lot more. They can create new ways of portfolio integrations and design a digital playbook for portfolio companies. The playbooks promote rapid technology deployment in portfolio companies, leading to faster growth. They also help PE Firms implement the most appropriate exit strategy.  

How do portfolio companies benefit from such collaborations? 

This may sound beneficial just to PE Firms. However, these collaborations open several opportunities for portfolio companies. They assure growth at a faster pace and reduce their technology debts. The companies can leverage technologies to transform across verticals like marketing, knowledge management, employee experience, customer satisfaction, operations, etc.  

In a culture built on advanced technologies, value flows in multiple streams – across various departments in the company and to the end user, from PE Firms to portfolio companies and vice versa, collaborators like Xebia to PE Firms and their portfolio companies, etc. These are the most ideal collaborations and relationships beyond investments that carve clusters of conducive ecosystems even in highly competitive markets.  

In such collaborations, innovations find new purposes, technologies find applications in multiple ways, and growth is mutually beneficial. The collaborative framework allows software products to be customized for, and tested in, several contexts. Their impact can be assessed holistically. The methodologies like Agile and DevOps applied in various domains enable the sharing of knowledge and insights beyond the boundaries of companies and foster innovation in the ecosystem.  

The starting point of such humane business relationships is forming meaningful connections and collaborations that nurture one another. If you’re passionate about creating such a business environment that rests on pillars of support, collaboration, coexistence, and co-creation, please consider learning more about how we help both private equity firms and their portfolio companies succeed. Learn more »