Digital is now a key component of effective value creation planning
Healthcare Services was our most buoyant sector with the overall consultancy demand being the creation of 24-36 month digital strategies to underpin Value Create Plans for ambitious portfolio companies.
An example is a healthcare company purchased and backed by its second PE investor in 2019. After being introduced to the senior management team and board, our objective was to focus on strategic opportunities that drive up the multiple at the next transaction. We examined opportunities for centralisation, internationalisation and diversification - all of which could be accelerated through digitisation and increasing digital capacity. Now that the strategy is delivered we are planning a 2021 delivery road map that will support the internal marketing and IT teams to deliver the VCP activity.
Using digital to increase top-line growth and realise a greater margin
We started two strategic consultancy engagements that examined routes to differentiation through frictionless digital journeys, right time product/service offers and leveraging marketing automation to increase acquisition budgets' efficiency. The latter remains one of the most significant untapped efficiencies we see in the market, and I would be delighted to discuss with your portfolio.
Digital re-platforming and integration in Financial Services and B2B is a continuing theme
We expect to see more of this activity in 2021. Q4 saw three clients engage us in creating digital strategies with ballpark investment options for re-platforming and integration projects.
Whilst briefs, target markets and tech stacks varied, all of these portfolio business clients needed compelling digital front ends, the ability to allow customers to have 24/7 personalised self-servicing and intelligent cross/up-selling. All of our recommendations benefited from instant scalability, improved loyalty and more significant revenue per account.
Financial services, particularly Insurance and Wealth Management, is expected to be busy with transactions in 2021.
Exporting our UK best practice
Equator is now exporting the successes and 'lessons learned' from the UK into Europe and the USA, where aspects of digitisation and digital marketing aren't always as mature. Non-UK headquartered healthcare and Financial Service businesses dominate these conversations, and they are benefitting from our branding, personalisation, automation, and digital marketing expertise learned from their high-performing UK equivalents.
Tech investing in digital marketing diligence
Although overall deal numbers are still lower than expected, Q4 2020 saw another rise in requests for digital marketing due diligence for tech-based targets/portfolio companies.
This continues the 2020 trend of PE houses having preferred diligence suppliers for specialist Financial Services infrastructure, and engaging with Equator for our digital marketing expertise to ensure all risks and opportunities are known pre-deal. The majority of the briefs focussed on sanity-checking digital channel projections and in-house teams' resilience to support growth.
"Q4 2020 saw another rise in requests for digital marketing due diligence"
Our PE Industry Observations for 2021
CGT fear is creating opportunities
The threat of CGT increases is having the (possibly intended) effect of bringing privately owned businesses to market that may not otherwise have been considering buyout ready. On the one hand, they represent an opportunity for PE to back senior management in Buy Outs that release the potential for growth in companies with weary owner-managers, leaving their successors with the remaining runway. The downside is that in coming to market early, the businesses are either not yet fully baked / mature (so fall below PE's sweet spot of profitability and cash generation levels) or are pandemically challenged and have a few bumps left in the road ahead.
These are still a welcome distraction for PE as value can be extracted in the best ones. In 2021 we expect to see extra diligence demand to unearth enablers or barriers to achieving the necessary growth to allow PE type returns going forward.
Valuations remain high
With the point above excepted, our Private Equity clients have the conundrum of whether to overpay for a strong business and hope to continue to ride the wave or look towards more challenged companies where recent events have suppressed growth, absorbed cash or undermined the story.
Following 2020’s unprecedented challenges, there are very few bargains out there and 'doing nothing' remains a dangerous strategy when LPs reward neither recklessness nor inaction. The key will be focusing on underlying fundamentals and finding value creation plans that stand-up post-COVID. Understanding the difference between recent performance (which may not be sustainable post-pandemic) and those trends (including digitisation) that are here to stay, will be critical when deciding on post-investment strategies. This is where we excel - helping PE tiptoe in search of long-term value.
Deal activity will accelerate
We're already seeing an uptick in deals in just the first week of January. Our clients are reporting far higher activity levels in what is set to be a busy first quarter. A combination of delayed activity from 2020, CGT's impact, and the positive flip side of stubbornly high prices (attractive exit environment) seem to be driving activity and optimism.
"We're pleased to see the ever-increasing realisation of the unique opportunity for quality digital adoption to create value"
From Equator’s perspective, we're pleased to see the ever-increasing realisation of the unique opportunity for quality digital adoption to create value, whilst acutely aware of its destructive nature, when poorly executed. There's no doubt that the next additions to portfolios will need to be more technology savvy and we're looking forward to helping our clients navigate these paths pre-deal, post-deal and exit planning.