A young partner at a venerable private equity firm recalls an incident when he and several of his peers were thumbing away at their Blackberries outside the hotel during a conference. One of the firm's senior partners, still slim and hearty in his seventies, watched them like they were skateboarding on his front porch. ?You know, you should get one of these,? the thirtysomething said. ?Now why would I want to do that? This is all I've needed for decades,? the older partner replied, waving a pocket-sized memo book. ?And best of all, when I drop it, it doesn't break.? The ?youth? chuckled and promptly returned to thumbing another email.
Change happens. The attitude of a fledgling upstart firm isn't the same as its brethren hustling for their seventh fund. Neither are their IT needs. Because the transition from rookie to veteran rarely goes as planned, the technology solutions need to be just as nimble as the rest of their operation.
However, there are some rough guidelines for building IT capabilities as a firm moves from one fund to the next. The first fund is often the leanest, and most firms choose to outsource all their IT needs to a consultant, though the right fit may take some rigor to find. By the second or third fund a CFO is brought aboard, and IT is a common issue for him or her to manage, even if that means simply negotiating the consultants' contract. At some point, the firm's internal staff grows to a size that requires someone in-house to manage the IT program on a daily basis. The last stage is appointing a full-fledged chief information officer who not only manages IT for the firm but addresses technology integration and improvements across the portfolio.
Out of the gate
Raising the first fund, with its uncertainty and threadbare budget, can be nerve-racking. There is the temptation to leave IT for later in the life of the fund, and trust the partners to tackle any complications themselves. Some firms have a partner whose tech savvy might be of use, but fixing that crashing PC robs time from due diligence or meeting investment bankers. At this point, the question is less one of strategy, than of insurance. How many computers can go down before it starts to hurt the bottom line? What if they all go down in the midst of an auction?
The right IT consultant can allay that worry, and service contracts can be tailored extensively to match the firm's level of need. Consultants can build the initial infrastructure of the firm's IT or merely troubleshoot. But outsourcing IT doesn't mean that it is out of sight or out of mind. Mark Weinstein, VP of IT for Boston-based Charles River Ventures says, ?Consultant invoices need to be reviewed, and the relationship needs to be managed.? And the crux of the relationship at this phase is usually response time when things go awry.
Firms should have a frank conversation when sourcing consultants. Some questions they must ask include ?What will be the response time?? 'How long will a partner have to wait when they call to say their computer is down?' One in-house IT expert with a consultant background said that six hours is a fairly rapid response. Those six hours are to arrive at the location, not to fix the problem. Whether private equity partners can wait that long, however, is a different matter.
The other issue with consultants, especially those building IT systems from scratch, is their lack of familiarity with the private equity business. One CIO finds consultants tend to over-design the system with bells and whistles to err on the side of reliability. The catch-22 of this situation is that a consultant with other private equity clients will tend to be a more established provider, complete with fees commensurate with their experience. A younger firm may undercharge in service fees, but produce a more expensive solution, which in the end may be an asset. A muscle car's engine housed in a Honda can still purr.
Sometimes the best match for an IT provider is one that resembles the debut fund. A small, newly founded IT service with a few experienced professionals can blend the insights of a veteran at reasonable prices. They may have no collective track record, but individually they may have some notable names on their resume. Sound familiar? It should.
The next upgrade for a fund may not concern anything related to technology. The second or third fund prompts many firms to search for their own chief financial officers. ?The CFO often doubles as head of IT at this point,? says Sam Tang of Newport Beach, CA-based Montauk TriGuard Management. A CFO's previous experience with IT budgeting adds greater rigor to invoicing, which can help steer changes to the service contract as the firm adds staff and other offices. As that fund moves into fourth and fifth funds, when exactly should a firm invest in an in-house IT professional?
When every second counts
A partner's time is always tight. When the firm matures, the partner starts juggling an increasing number of funds, with investments to manage in each. That sluggish or crashing PC that was a nuisance in the beginning can allow workload to snowball across several investments. Time is money, and time gets more expensive as a firm ages.
Having an in-house IT expert will not ensure a flawless performance, but it will remove the waiting time that comes with consultants. One partner explained that the value of someone on the inside is continuity. Consultants will send out whoever is available, which can often vary for each call. A single expert will get to know the preferences of the staff and tailor both the technology and their tact to that executive. Some partners will want to know the minutiae behind a given problem. Others want a red button they can push to instantly solve their issue like a magic wand. IT breakdowns don't have a terrific sense of timing, so the right type of response can help diffuse the frustration of the moment.
That continuity also fosters a better grasp on what the particular firm needs over time. Understanding the deal process comes with spikes in activity can better determine the true capacity needs of a firm. The in-house expert can then work closely with specialized vendors or the consultants to make certain the infrastructure is exactly what is required, nothing more, nothing less. They speak the same language as the consultants, so there is no gap between the partners' expectations and the deliverables.
Onward to the portfolio
The next step up may be the hiring of a full fledged CIO. While most private equity CIOs will mange the firm's IT, the six figure salary and share of the economics comes with expectations beyond that. That compensation structure is largely based on their ability to think strategically about IT, both within the portfolio and among pending deals. ?Ten years ago, no private equity firms were looking at tech integration issues. Now they view it as a necessity,? says Paul Groce of the executive search firm Christian & Timbers.
Groce explains that the CIO is brought aboard for three core roles: acquisition evaluation, IT turnaround initiatives, and technology integration due to M&A activity. While each of these activities primarily involves tech expertise, they also demand a depth of understanding about a particular industry. ?Most firms tend to search for CIOs within an industry linked to their investment focus,? says Groce.
While the CIOs may have relevant industry experience, there remain key questions about evaluating their resumes. For partners who do not have a technology background, what should they look for in a candidate? One headhunter stressed the importance of prior experience with due diligence and valuation. This usually means some experience evaluating M&A for a previous employer that demanded skills in troubleshooting IT issues, and blending the infrastructure of acquisition targets with their own. Many esteemed CIOs can have little to no experience in this area as traditional corporations have complex enough IT needs that a CIO is required to manage the internal system exclusively. The other element of a candidate's record is their tenure at past companies. ?For a CIO to truly impact an operation it often takes two or three years,? says Groce. An executive with short stints at a number of businesses should prompt a closer look. Referrals should come from the business side of the former employer, not the CIO that may have supervised them or other tech professionals, though their thoughts can be valuable. One headhunter stressed that a candidate should have won over the laymen, not just fellow technocrats. The CIO role demands a certain political acumen, so there has to be proof they can integrate well with multiple constituencies. Once a CIO is aboard, the firm can leave the development of the IT to that person. But even given these broad parameters, the questions concerning a firm's IT can't be posed in a vacuum.
Market conditions can create unique scenarios and one firm's evolution may defy the standard map completely. Weinstein joined Charles River Ventures in 2000 to apply his tech expertise as a ?vertical professional? across the entire portfolio, much as the firm brought aboard a human resources specialist to do the same. ?I was expected to devote 95 percent of my time to the portfolio, and five percent of my time to internal IT,? Weinstein says. The firm was already twenty-five years old and on its eleventh fund. He adds, ?We were operating at bubble speed with over seventy professionals between our East and West Coast offices.?
That bubble burst of course, and CRV trimmed its sails to a leaner operation of thirty executives. Weinstein's responsibilities moved inward, to address the firm's internal IT needs. The lighter, more efficient incarnation of the firm uses Weinstein to manage their outside IT vendors and keep the computers, Blackberries and videoconferencing on the cutting edge. The priority of late is to ensure that the partners' home computer works with the reliability and ease of their office one. ?I'd say that today, on our thirteenth fund and thirtieth year my workload is 95 percent internal, with that five percent on the occasional project for one of our portfolio companies.?
The current boom is allowing firms to grow at an unheard of pace, but that growth doesn't simply affect the number of analysts or the size of the deals. It taxes the entire operation, applying pressures to elements such as a firm's IT solutions. The market leaders will address these issues, even if they fall out of the traditional range of a partner's attention. The industry is well beyond relying on steno books, and there's little chance of returning to such simple times.