Private Equity IT infrastructure
Our focus at PE Stack is on specialized solutions for the PE and VC space, but we also encourage our clients to consider the importance of core IT and stress the advantages of working with specialized firms which understand how private capital firms operate when selecting a provider.
We feel smaller fund size and operations is no longer an excuse for outdated IT infrastructure, a view shared by Jeff Fantalis and John McClure at beiNVENTiV - a Colorado-based IT firm which leverages its experience in private equity to provide a compelling alternative to generic IT consultants for boutique and mid-sized private equity firms in the United States. We sat down with beiNVENTiV to discuss COVID, how any firm can achieve institutional-grade IT regardless of size, and the importance of IT assessment during PortCo due diligence.
Q&A
PE Stack: We have seen a sharp increase in demand for Private Equity specialized technology solutions recently. What are the trends you have seen regarding core IT and COVID’s effects on private equity?
beiNVENTiV: Many firms have just started thinking about core IT. With the lockdown, working from home securely has been an issue for many PE firms that still use on premise servers. It’s still possible, but painful. That’s why many have asked for our help in moving to the cloud from on premise servers.
PE Stack: External pressures such as increased LP information requests, compounded by wider operational disruption caused by COVID-19, have been a prime driver for many of our clients seeking to upgrade their technical capabilities in areas such as portfolio monitoring. Does this resonate with core IT requirements as well?
beiNVENTiV: Core IT is a little different than, say, IR tools. We haven’t seen enough LP pressure on GPs to improve their core IT as much as their push for better portfolio monitoring and reporting tools, but we do expect it to increase over time. The private equity industry reacts to problems, and right now the main problems are data collection/normalization, online collaboration and remote working access.
PE firms are not regulated from a technical standpoint, so they do not ask the same questions that other entities ask, such as ‘how bad would the consequences be if there was a data breach?’ Most companies could, and would go out of business if the wrong things happened to them, particularly the combination of IT mismanagement and a large data breach. Some boutique funds especially don’t think that this applies to them and have some scary vulnerabilities in their operations. A data breach or core IT failure will happen eventually to some firms, and LPs will expect a game plan from their GPs to deal with it.
Fund managers need to think about best practice data stewardship, especially due to the abundance of highly confidential information they hold such as investor and PortCo bank account details, financials, and other personally identifiable information. It doesn’t even cost that much to prevent data leaks, but to fix the mess up after it happens… extremely expensive, and damaging to the brand.
PE Stack: Some firms will have a defined or ‘de-facto’ employee responsible for maintaining core IT infrastructure. How do you provide additional value beyond that provided by the existing team?
beiNVENTiV: Our goal is to improve efficiency within private equity by providing a level playing field for fund managers that don’t have limitless resources or countless employees by utilizing our expertise in private equity workflows and leveraging our ability to customize mainstream enterprise software to work effectively for private equity use cases.
Besides, most PE firms’ IT departments are busy maintaining the status quo– keeping the lights on. They don’t have time to learn new and best practices, and also don’t have the experience or exposure to apply it to their specific organization. In fact, most companies have no idea where they stand compared to the industry in terms of IT.
Still, some teams push for new technologies every once in a while. The problem in these cases is that most C-level executives in the industry are non-technical folk, and most IT people are non-business folk. This results in a misalignment in communication: IT guys talk about the technical standpoint, but decision makers need a clear understanding of the business value.
We understand the technology really well, but our real competitive advantage comes from our deep understanding of private equity and our ability to translate technical value into business value, while also considering the time value. An interesting example we can give on this front is one of our clients asking for a project to improve productivity. The internal IT team explained the technical value, and the execs translated the value add to a qualitative measure of increased productivity. When we performed our due diligence, we found out that the proposed project would cost $100K, but the increased productivity would be capped at 3 hours per month. Through our experience in quantifying and gapping the bridge between technical value and business value, we were able to recommend to the client not to move forward with the project. It’s not about spending more or less; it’s about spending smart.
PE Stack: So why do many PE firms lag in terms of new technology adoption?
beiNVENTiV: Changing or upgrading your tech infrastructure used to be quite a serious undertaking, both financially and technically. So the mentality became “If it ain’t broke, don’t fix it.” Yet, technology improved immensely and costs dropped significantly. Now with COVID, PE firms are realizing the burden of their outdated IT infrastructures, and after talking to us, thinking about core IT in a completely different way. We are actually seeing a rapid shift from the old mindset towards “What else can tech do for me?”
PE Stack: What is the approach you take that helps PE firms see core IT in a new light?
beiNVENTiV: The main path we take is education and awareness. To achieve our goal, we focus on two key points. Firstly, tech is cheaper and more flexible than you think. As an example, a client of ours thought that having a virtual data room was too expensive for them. We told them that their existing technology could be customized to have a virtual data room, and set it up in less than an hour and at almost no extra cost. The flexibility of tools such as Microsoft 365 is severely underestimated.
The second point we make is the competitive advantage of understanding and having a strong IT infrastructure. PE firms know how to add value on the business side extremely well, but if they could also help their portcos with IT, it would be a game changer. Some of the largest tech focused PE firms have built proprietary technology that they share with / steer towards their portcos for this reason. The thing is, you don’t need to build proprietary technology. Deeply understanding what each of the ‘more generic’ technologies are capable of in terms of customization, coupled with a team that understands the ins and outs of business processes can provide solutions comparable to more expensive tailor-made platforms.
PE Stack: Besides improving efficiency in internal operations, we have seen that IT consultants in private equity can also help with technical due diligence. Can you quantify the added value of a specialized IT consultant such as yourself in the investing phase?
beiNVENTiV: Core IT and investing are not distinct from each other; in fact, they’re much more closely aligned than you think. As an example, some PE firms want to merge two assets post-acquisition, but when you look at the IT of these two organizations, you might realize that you’ll actually be bringing the assets’ efficiency and value down by merging them. Unfortunately, there is no easy way of identifying this without a deep technical due diligence.
We perform technical due diligence on target acquisitions to (1) identify hidden costs, (2) assess the timeline of technical implementation, (3) and find new ways of reducing that cost post-acquisition, immediately resulting in an upside on EBITDA. Furthermore, we approach each of these projects in light of the PE firms’ end goals. Post-acquisition IT restructuring highly depends on whether the buyer wants short-term exit, long-term growth, to cut costs, to scale the company… You have to understand the business to use the tech effectively.
To give an example, we were brought in to evaluate the core IT of a target acquisition after the Transition Service Agreement (TSA) was signed. The timeline and budget were determined by a ‘technical due diligence’ performed by non-tech personnel ($600K estimation, undisclosed to us), and our findings were that the cost of rebuying / implementing all the software would actually cost 3 times the amount they thought it would.
If our client had brought us in before the TSA, we could have evaluated the technical debt the target company accrued that would’ve definitely affected the price our client paid to acquire it. Even though we came after the TSA, we still managed to cut the IT costs almost in half by changing some systems and customizing others– still over their initial budget but a significant improvement than what they would have to deal with.
A similar client brought us in after the TSA again. We could have inserted 4 simple lines on the TSA if they had brought us in before, saving them over $150K. The funny thing about IT consulting is that most PE firms think it’s super expensive and not that useful, but in reality it’s much cheaper to get IT due diligence than to deal with the technical blunder later.
beiNVENTiV specializes in customizing Microsoft technologies for boutique and mid-sized US private equity firms to improve workflow efficiency, in addition to performing IT due diligence on target acquisitions.
For more information on beiNVENTiV, please contact Jeff Fantalis.
PE Stack: What would be your final piece of advice be to private equity firms regarding core IT?
beiNVENTiV: If you think of IT as a capex, the costs of failure will be large. Think of it as an opex, a continuous spend, and a continuous aspect of private equity to update and upgrade. Start IT due diligence early. Involve people who understand both the technical side and the business side really well. Utilize tech! Don’t let it become a liability; make it your strength.
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