Although firms are competing for attractive assets as

Although Article 50 of the Lisbon Treaty
has now been invoked, uncertainty around how an eventual Brexit will impact the
private equity industry, still looms. The trading environment in the UK is
likely to be affected with investment in the UK adjusted to ensure funds are
not overly UK exposed. If financial services companies in the UK lose
passporting rights this will make it much harder to do business in Europe;
although an equivalence arrangement could overcome some of these problems.
Additionally, the UK’s exit from the European Union could result in a large
number of EU nationals leaving the UK or indeed, deciding not to come here in
the first place creating another blow for businesses here. However, this is not
the only issue affecting the world of private equity at the moment. Another hot
topic at this time, is digitisation.

Maintaining returns in the private equity
industry is anything but guaranteed. As the field grows more crowded and the
amount of uninvested capital, or dry powder, is at an all-time high, firms struggle
to differentiate themselves. Added
to this, many more firms are competing for attractive assets as greater numbers
of Chinese investors are making acquisitions resulting in increased competition
for deals. More than ever, private equity managers need special insights to
find value where others can’t.

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Digitisation is still a
largely untapped area that offers extraordinary opportunities for value
creation for those investors who ask the right questions up front. For private equity firms, digitisation
can create value within portfolio companies by improving their processes, operations and performance
thereby generating stronger returns and making them more attractive to
investors as well as buyers. As the level of digitisation becomes increasingly
important in judging a company’s position and prospects, private equity managers need to be able to assess a target company’s digital
capabilities and opportunities for transformation, as well as its competitor’s digital
capabilities. Private equity firms need to
understand the impact that digital has on their investments; digitisation should, therefore, be
a key component of the due diligence process undertaken by them and their legal
teams.

How will increasing
digitisation affect the overall business model? To what extent has the target
company digitised its products, services and operations? Which products and
services are threatened by digital disruption? How does the level of
digitisation compare with that of its competitors?

These are some
of the questions that ought to be part of a private equity investor’s due
diligence exercise, helping to assess a
company’s digital capabilities and providing guidance on any value that can be
unlocked. A thorough digital due diligence assessment will detect both risks,
as well as opportunities such as areas where competitors underperform or
markets which remain untapped.

In the current investment
market, it is more important than ever for private equity firms to choose
target companies carefully and to develop them to their full potential. Digital is creating huge opportunities for
those who can adapt quickly, but
unless private equity firms and their legal teams incorporate a digital due
diligence into their practices, they increase the risk of losing opportunities
as well as competitive advantage.

The trend towards growing digitisation
will also provide huge opportunities for large international law firms that
specialise in equity finance as many private equity investors may need additional expertise in
recognising the importance of digitisation as part of their due
diligence and in developing a
strong digitisation strategy. Leading law firms such as Kirkland &
Ellis and Clifford Chance which specialise in private equity transactions are
undoubtedly taking advantage of this opportunity with Matthew Layton, Managing
Partner at Clifford Chance having previously commented on this matter. “Technology and digitisation are
transforming many industries – from manufacturing to financial services and
beyond – marking the onset of the so-called ‘fourth industrial revolution’. We
stand ready to support clients as they adapt to these seismic shifts, and as
the risks facing their businesses evolve and expand. Boards must be proactive
as disruptive technologies drive extraordinary transformations in their markets.”

 

With the right legal expertise behind them private equity firms can get
to the root of ascertaining a
target’s digital capabilities and potential for future returns, helping
them to evolve in line with the growth in digitisation and remain ahead in this
fast paced and increasingly competitive environment.