No industry is immune to digital disruption. It has shaken up not just IT, financial services and consumer-driven markets, but also stormed into traditionally slower-moving sectors such as construction and heavy industries. And private equity.
With industrial and manufacturing companies expecting to make annual digital investments of more than $900 billion – equivalent to 5 percent of revenue, according to a PwC survey of more than 2,000 respondents globally, private equity firms have to think digitally. If they don’t, they risk letting themselves and their portfolio investments lag behind their competitors.
Stockholm-based EQT is one firm that has embraced the digital challenge, seeking to transform the way it operates, as well its portfolio of 70-odd companies. To drive change, the firm has built a digital team, tapping talent from the likes of Google, where its head of digitalization Olof Hernell worked until last year and where its head of marketing technology Sven Törnkvist, most recently vice-president of digital development at Ericsson, also did a seven-year stint. Törnkvist joined in February, as did chief information officer Petter Weiderholm from Spotify. They were followed by head of engineering Daniel Wroblewski, who arrived from gaming company King in March.
The team has two roles, says Törnkvist. It supports EQT’s existing portfolio companies while “pollinating the ‘EQT mothership’ with digital skills and new, more efficient ways of working.”
“After all,” he adds, “you cannot tell the portfolio companies to digitize unless you are doing it yourself too.”
At the portfolio level, the team’s work varies according to the investment’s specific needs. “We don’t just focus on one area, instead we take a holistic view to adding both technology, as well as talent and skills, across an entire business,” Törnkvist says.
Talent not technology
Talent, according to the PWC survey, not technology, is the biggest challenge to companies seeking to digitize. Recruiting digital professionals is difficult, agrees Törnkvist. “While there is an abundance of people, consultants and agencies which label themselves ‘digital’, few actually have the goods,” he says.
“There’s a very real shortage of competence in the talent market, but EQT can offer support in hiring and developing digital expertise.”
Any team needs to be of “adequate size” to have impact, he notes. “Often, companies hire individuals or, as we like to call them, ‘digital alibis’. Very few individuals, even on the executive level, can singlehandedly change the modus operandi of an existing business if that business is not in a crisis mode.”
To that end, he advocates that companies look internally to grow their own digital talent “as single external hires typically won’t suffice.”
EQT’s digital team has no intention to “lecture” management about their respective markets or the digital disruption impacting their industries, Törnkvist says.
“Having said that, we can almost always identify gaps between the portfolio companies and best-in-class performance when it comes to, for example, utilization of installed technology, approaches to innovation, testing and learning, leveraging data assets, marketing, cross-functional collaboration and personal productivity.”
He points to in-sourced analytics as one area where companies can gain. “The value that such real-time customer insights can bring to any company’s R&D, marketing and sales is enormous. Given the overall maturity in the competitive landscape, excelling in this area typically yields significant advantages.”
But, portfolio company management does not always readily take on the digital team’s advice. “We sometimes find ourselves ‘selling’ the problem,’” Törnkvist says. “The individual portfolio company may not experience a problem simply because they may not be aware of the full value certain technology, digital ways of working and digital talent can deliver.”
To that end, it is crucial for EQT to gain chief executive buy-in and commitment, he says, “to lead the digital journey, with our digital team there to guide and support.”
Returning the favor
That buy-in expects returns. Most companies surveyed by PwC believed they would see a return on their digital investment in two years or less. Companies anticipate annual digital revenue increases of 2.9 percent, equivalent to a rise of $493 billion annually over the next five years. Costs are expected to drop by 3.6 percent annually, saving $421 billion over the same time period.
EQT has yet to see a digitized portfolio company complete a full cycle, but “typically the first area where we see digital deliver significant value is in marketing. In too many companies, legacy marketing is considered a cost center, something you have to have, but can’t really measure. We simply don’t accept such lazy marketing,” Törnkvist says.
“By leveraging digital, marketing can be treated as a measurable investment that is focused on value creation. EQT applies the same mathematical rigor to marketing as to acquisitions.”
Marketing also serves as an example of how revamping a firm’s approach to digital is not undertaken in isolation. The firm does not “find it meaningful to differentiate ‘digital’ as a separate thing, we recognize the value of being digitally mature on an overall level,” he says.
“There is no separate strategy for digital marketing – we should talk about marketing strategy as a whole in the digital age. Looking at how much better companies with a high digital quotient (across all functions) are performing financially, the long-term value is massive.
“Digital influences everything. Every value-creation strategy can benefit and become a stronger play by using what the digital era makes possible.”
Fundamental to the firm’s approach to digitization is “having the necessary competence at EQT and acknowledging that the PE industry itself is a target for digital transformation,” says Törnkvist.
EQT has a track record of investing in technology companies, but with its first venture capital vehicle that closed in May, EQT Ventures Fund, it has sharpened its digital focus. The €566 million fund invests in fast-growing tech-enabled companies primarily in Europe. One of its most recent investments was in Verto Analytics, a Finnish-American company that provides audience measurement tools. The fund will “invest in and support the development of tomorrow’s winners,” says Törnkvist.
He points out that successful companies have always leveraged new technology and adapted to change, adding that the difference with digitization is the speed of transformation.
Firms overlook it at their peril. “In the long term any company who ignores fundamental shifts in markets and society will die. In the short term, ignorance means opportunities lost and a gradual erosion of competitive advantage,” Törnkvist says.
After all, as he says, the value of digital is no secret.
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