Over the past 18 years private equity has become firmly embedded within the mainstream economy in the UK and Europe. At Intuitus, the leading provider of technology and IT advice to the European private equity sector, we’ve witnessed first-hand the many challenges, disruptions and opportunities that have impacted the industry during this time. As we celebrate our own 15-year anniversary next month, we take a brief look at how the evolution of technology and IT have impacted the role of due diligence in private equity and how Intuitus has been at the forefront of this change.
The growth of the private equity industry
According to recent figures published in Real Deals, mid-market fundraising in the UK hit an all-time record in 2016, while European fundraising levels grew for the third consecutive year. As the industry has burgeoned in key European regions, including DACH, the Nordics, France and Benelux, Intuitus has transitioned from being a predominantly UK-centric business to one where over 40% of our transaction advisory work is delivered outside the UK. Including our portfolio advisory services, since 2002 we’ve delivered over 1,200 engagements across all industry sectors. Intuitus has grown by an average of 25% year-on-year over the last decade.
The impact of technology on private equity
During this time, information technology has evolved from a business support role, rarely the focus of attention by private equity on the way in, to a principal enabler of growth, operational efficiency and value for organisations. Investee companies today, even those in traditional sectors, are much more likely to be differentiated by a technology platform and, when speed to market and customer service are everything, the implications of a failed system or information breach are potentially catastrophic.
In the technology industry itself there has been a proliferation in the software ecosystem, with mainstream vendors and vertical specialists working with a variety of integration partners, managed services providers and niche advisers. Emerging technologies are a constant threat to established players. For the technology providers, product performance is intrinsic to business success and private equity, with its seemingly insatiable appetite for such businesses, has readily embraced the need to get closer to the technology before committing. In the five years between 2012 and 2016 the number of completed deals that Intuitus advised in the Software / Technology / Communications and IT Services sectors increased by 510% compared to the previous five-year period.
The importance of value creation and exit strategy
In the past, technology and IT due diligence were primarily about identifying potential risk in a target business. Today the emphasis is broader, with a particular focus on how technology can impact the value creation plan.
At Intuitus we’ve evolved our services to support our clients wherever they are in the investment life cycle – at the point of acquisition, during a period of ownership or approaching exit. We’ve extended our core due diligence offering for buyers to include a greater commercial overlay and a deeper assessment of critical areas such as cyber security and software code maintainability. Our portfolio work includes strategic and operational advice and we increasingly deploy interim CTOs and IT Directors to execute the change agenda. In addition, exit readiness and sell-side due diligence make up a larger proportion of what we do. Ultimately, our purpose is to advise investors and management teams on how to optimise technology and IT value in the period leading up to, and at the point of, sale.
Technology trends and regulatory impact
As technology takes centre stage we’re seeing trends emerge more frequently than in previous years. Cyber security has been at the forefront of people’s minds after several, recent high-profile incidents, including the TalkTalk security breach in October 2015 and the WannaCry software attack that affected a number of countries and organisations, including the NHS, earlier this year. The current focus is the General Data Protection Regulation (GDPR) that comes into effect in May 2018. The regulatory and compliance industry is having more of an impact on private equity, and due diligence has had to evolve to meet the needs of our clients. The potential impact of the forthcoming GDPR legislation is a key concern for our clients, and to address this Intuitus will be offering GDPR readiness as a key component of all our transaction advisory engagements from November onwards.
As ever, it’s difficult to predict what the next few years will hold for private equity. The industry’s dry powder, ongoing availability of debt and the still-buoyant stock-markets are offset by continued economic and political uncertainty. The impact of Brexit is still to be determined on all geographical fronts and the political turmoil in the UK continues to concern most business leaders. But private equity remains an attractive asset class and the industry has proven itself to be resilient, adaptable and creative – so we should remain optimistic.
From a technology advisory point of view, evolution continues to be the watchword. Differentiation and value creation will continue to be core challenges to be unlocked by a rapidly-evolving technology scene. Digitalisation and disruptive technologies, for example, will be increasingly in the spotlight as private equity quickly seeks to understand and mitigate the risks, and capitalise on the opportunities. Intuitus is already investing in these areas of expertise. We’re looking forward to continuing our role as a lead technology and IT adviser to a dynamic and constantly changing private equity industry.