The private equity industry has grown exponentially since its inception and the private equity IT field. In 1976, there were only 450 employed in the field. In 2009, that number had increased more than tenfold to 5,000 professionals within the industry. Furthermore, 44 percent of those surveyed held Director-level or above positions. This is due to rapid growth and increasing complexities in transaction structures as PE funds have taken on a more active role in managing their portfolios rather than just being passive investors. The average fund life has also been extended from eight years to ten years plus, creating even more work for management companies that often have dozens of portfolio companies under their belt at any given time. Private equity IT challenges are an everyday occurrence.
Moving to the Maintenance Mode of Investing
As more and more PE funds move into the ‘maintenance’ mode of investing, more of them are acquiring or purchasing wholly or partially owned subsidiaries. This was not as common practice in the past. The increased complexity presents new challenges for private equity IT managers whose work may be checked by many parties, including general partners (GPs), portfolio company management and board members, consultants, and third-party service providers. In particular, GPs will push for reduced costs and streamlined processes; portfolio companies will want opportunities to increase revenue through e-commerce initiatives; investors will look for improved transparency leading to better decision making, and regulators will apply pressure on management teams to establish better governance practices.
Third-Party Service Providers
One of the most salient challenges a private equity IT manager encounters in dealing with third-party service providers. In many businesses, external partners are responsible for most data processing and other key business operations. It can often be challenging to ensure that these assumptions are accurate, that vendors are meeting all contractually obligated deadlines, or that they’re actually doing their job. If one third-party provider goes down, it may cause cascading failures throughout your systems, resulting in downtime, lost revenue, or worse.
With this mix of internal and external stakeholders comes an increased need for transparency within PE funds. Managers must now abide by regulations requiring them to produce regular reports containing details about current holdings and historical transactions. This also requires private equity IT professionals to understand their portfolio companies’ business operations better, as it may no longer be sufficient for them to merely ‘plug and play.’
Traditionally, IT managers were often encouraged to focus on ‘low-hanging fruit’ initiatives with the highest ROI. However, they must constantly weigh competing priorities and determine which projects should receive funding and support. Management companies themselves need to figure out how best to allocate their resources; do we buy that new server or put more money into marketing efforts? Do we improve our technology infrastructure by upgrading existing equipment or spending money on an upgrade project? The list of decisions is never-ending. Priorities of any company must be analyzed with confidence and strategic measures that will benefit the company over time.