How Private Equity Firms Can Drive Innovation

Written By Alla Levin
July 05, 2023

In a sense, private equity firms have always relied on innovation as part of their investment model. These firms buy companies, assist in their development, then sell the newly-renovated companies for a profit — usually four to five years later. 

Recent inflationary pressures, rising interest rates, and threats of a recession have only pressed private equity firms toward further innovation and digital transformation. In fact, private equity innovators are driving many businesses forward. Here are some ways private equity firms drive change in today’s economy.

How Private Equity Firms Can Drive Innovation: Digital Partnerships

Private equity (PE) firms can help companies adapt to an evolving digital landscape. There’s no one-size-fits-all approach to this, which is partly the point. PE firms can evaluate a company’s digital footprint and make strategic shifts based on the needs of the core target market.

To accomplish this, many PE firms are partnering with digital developers to create new software systems and web-based solutions. For instance, the right software developer can create a customizable platform that augments a company’s efficiency and productivity or enhances how it reaches its client base.

Through these digital partnerships, PE firms are helping organizations pivot from legacy business processes and adapt to the future of business. And by boosting efficiency and business performance, these digital partnerships also empower enterprises to scale and grow.

The Public Cloud

One of the biggest trends in the push toward digital transformation is the increasing shift away from traditional data centers to the public cloud.  PE firms are looking toward public clouds managed by third-party companies like Amazon, Google, and IBM to lower costs and raise efficiency — something that’s impossible with legacy systems.

For most companies, cloud-based solutions are all about cutting costs. But for others, cloud-based technology opens doors for new ways of doing business. For instance, companies such as Citco have built client-focused software solutions directly on the cloud, complete with software-as-a-service (SaaS) products customers can use to manage their accounts.

Automationcompanies such as Citco

PE firms can also be leading drivers of business automation. After all, PE firms typically invest in underdeveloped or underperforming companies, and these companies need every available edge to scale their business without necessarily increasing their company headcount.

Automated tools can be used for anything from accounts payable processes to inventory management. These features can be handy in an age where e-commerce and retail businesses stress about setbacks from the global supply chain crisis.

Perhaps most importantly, automated tools reduce the administrative burdens on existing business owners and their employees. Managers can redirect employees to more essential (or revenue-generating) tasks, often leading to higher employee engagement. 

ESG Criteria

Some of the largest PE firms are publicly-traded companies, which means corporate leadership must account for the values of their stakeholders. And the key way to do that is by adopting and reporting ESG initiatives.

ESG stands for “environmental, social governance” and is an umbrella term that refers to adopting environmentally sustainable practices; diversity, equity, and inclusion (DEI) programs; and policies that increase the transparency and accountability of corporate leadership. PE firms can therefore be lead drivers of ESG criteria since their success is directly related to their public reputation. 

Consumers and investors are eager to put their money into a company that aligns with their values, so as PE firms seek to renovate existing companies, they’ll be more likely to pursue green initiatives, such as electric vehicles or carbon offsets.

Flexible Funding Opportunities

Smaller businesses often face challenges when it comes to financing. Conventional lenders, such as banks, may not offer the kind of funding that fits the business model, or the business itself may be seen as “too risky” by conventional financiers. Private equity firms can access large financing amounts, often called “dry powder.” Small businesses, startups, and developing companies can tap into these financial resources. 

As a result, companies can secure the funding they need, especially during the critical launch phase. Therefore, PE firms can serve as essential backers of new technologies and innovative products and can continue to drive innovation by funding research and development for future projects and platforms.

The Future of Innovation

Private equity firms have shown surprising resilience in the face of economic instability and have also helped other companies adapt and thrive.  By pivoting from legacy systems to innovative solutions, PE firms have provided brand-new paths for new and developing businesses. For this reason, PE firms will continue to play an essential role in shaping the future of the U.S. economy and the landscape of American business.

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