When private equity (PE) firms acquire new portfolio companies, they focus on increasing the value of those companies and ensuring that they’re poised for success and growth.
When evaluating potential portfolio companies, and working to grow them following acquisitions, PE firms conduct due diligence and closely analyze a number of factors. These traditionally include the management team, the company’s strategy and execution, external market factors and other important indicators of a company’s potential success.
However, according to a resent study conducted by McGladrey, the fifth largest provider of assurance, tax and consulting services in the U.S., there’s another factor that could play a key part in the successful growth of a portfolio company and its value – information technology.
The survey showed that 55 percent of respondents look to implement both a 100 day and 12-36 month performance improvement plan immediately following the acquisition of a portfolio company. An additional 23 percent implement a 12-36 month performance improvement plan only. The bulk of the remaining respondents (15 percent) implement a 100 day performance improvement plan.
Regardless of the length, it’s obvious by the responses that improvement plans are essential for driving value. PE firms have normally included the usual improvements in their plans, such as identifying and adding operating partners at the portfolio company level, operating improvements and improving strategy and execution. Now, according to the report, IT infrastructure is being added to that list.
The report found that 55 percent of performance improvement plans focus on IT systems all or most of the time.
Businesses are relying increasingly on IT solutions and applications for business intelligence, sales enablement, marketing automation, supply chain management, financial reporting and metrics and warehouse management. With IT playing such an important role in businesses today, it’s not a shock that IT is playing a larger role in improvement plans.
Unfortunately, these solutions and applications can be expensive and require large investments in time and capital to implement. For this reason, PE firms are including audits of companies’ IT infrastructures in the due diligence prior to acquiring new portfolio companies.
“We evaluate IT infrastructure as a part of our due diligence,” said Shane Slominski, a Principal at Tonka Bay Equity Partners, a PE firm based out of Minnesota. “It is very important to understand whether the company has the systems in place to track and measure information needed to run the business today and – more importantly – as we grow.”
In other instances, PE firms are working to ensure that IT improvements are priorities in their improvement plans. This is especially important since IT solutions that deliver business intelligence and financial reporting are imperative for monitoring the success of other improvement plan initiatives.
“IT deficiencies are a critical issue as it’s difficult to make progress if you can’t track the results,” said Slominski. “That’s why IT diligence is so important. Many times a system upgrade is required to ensure we can access the information needed.”
PE firms have more than just management and operational efficiency to analyze when acquiring a new portfolio company. IT infrastructure and solutions are instrumental in running a business today. When conducting due diligence on a potential portfolio company, IT needs to be considered and subsequently worked into an performance improvement plan if it’s found to be lacking.