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Changing Private Equity Business Models

Short-term solutions are evolving into longer-term transformations

Private equity and venture capital (VC) managers were forced to transform their business models overnight in response to the pandemic. While most firms have been focused on successfully steering through the crisis, many are now thinking about what happens next.

Key insights

  • COVID-19 has forced private equity and VC managers to digitalize, a trend that will likely persist beyond the pandemic
  • While remote work policies will continue, in-person meetings and office experiences are still vital elements for business success and employee well-being
  • Crisis management, operational resiliency, and agility will be among the industry's priorities moving forward

Although the pandemic is still far from over, experts participating in a recent RBC Investor & Treasury Services (RBC I&TS) webinar shared their unique insights into how the crisis is likely to usher in a new way of working and thinking across the industry.

Digitalization takes the industry forward

As with many other industries, private equity and VC firms worldwide implemented remote working in March 2020, a process that accelerated a number of digitalization initiatives. Strict lockdowns forced leading private equity and VC businesses into immediately eschewing long-established manual processes in favour of digitalization. For example, managers have become enthusiastic adopters of e-signatures, which are being used more widely to facilitate wire transfers and to expedite the signing of legal agreements.

Investment firms are also paying particularly close attention to improving their data management capabilities. Historically, fund information has been stored in an unstructured fashion across multiple parties such as administrators, legal counsel, and depositaries. By organizing this data systematically, private equity and VC managers will be able to extract insightful analytics, which can then be used to identify and apply meaningful improvements to their investment and operational activities.

Investment firms are also
paying particularly close
attention to improving their
data management capabilities

Simultaneously, firms are also fully aware of the risks that some of these new technologies may be exposed to. Philippe Legrand, Managing Director, Country Head France, for RBC I&TS, noted that the industry has reinforced cybersecurity protocols in order to mitigate potential fraud risks that may arise. While COVID-19 has been destabilizing, the benefits of automation have been made clear to private equity and VC firms. As the crisis subsides, it is hoped that the industry will continue to embrace new technologies and digital tools.

The workplace of the future

COVID-19 precipitated one of the most radical workplace transformations in a generation as businesses had to adopt digital channels in the absence of being able to hold physical meetings. “When it comes to digitalization, in 15 days we put in place solutions that some thought would take years,” said Jeremy Albrecht, Managing Director, Head of Continental Europe, Client Coverage at RBC I&TS. “Everybody was positively surprised that the transition to work from home was accommodated without any significant disruption,” he added.

Panelist Jean-Marc Patouillaud, co-founder and managing partner at Partech Partners, anticipates that digital platforms will totally recalibrate the structure of the workplace. He stated that, “Right now, most workplaces comprise 70 percent office space and 30 percent meeting rooms.” In the near future, he predicts this ratio will likely tilt the other way around.

Nonetheless, others believe that elimination of in-person meetings and interactions is having adverse consequences. “For many companies, not meeting in person is slowing down projects and decision-making, especially within large groups. Among smaller companies, we are making sure tele-working is an element of the business, but certainly not the main factor,” said Bertrand Folliet, managing partner at Entrepreneur Invest.

Similarly, the well-being and mental health of employees–especially those living in small flats or isolating by themselves–must also be taken into account. “For some young employees, working in the office is a significant part of their social life. These employees anticipate there will be a balance between past and future practices,” said Legrand.

A new way of thinking about crises

Although financial institutions–including private equity and VC firms–took contingency planning seriously before COVID-19, crisis management is likely to become even more important as 2021 progresses. It is expected that firms will begin factoring a wider range of potential black swan scenarios into their contingency planning and staff training moving forward.

“We now have COVID-19 but France has previously suffered terrorist attacks, yellow vest violence, and a number of climate issues. This demonstrates that we should consider transitioning our thinking from 'business as usual' to 'crisis as usual',” said Olivier Younès, founding CEO at EXPEN and Professor at HEC Paris and Berkeley.

Benjamin Brion is the co-founder and CEO of Moodwork, a software company helping firms monitor and enhance their employees’ well-being at work. Brion said the company was now prioritizing training in crisis management and contingency planning for senior employees. “We need to shift to a mentality where we tell ourselves we will not go back to normal and we will have to prepare for it,” he added.

Crisis management is likely to become even more important as 2021 progresses

It will not just be firms and investors demanding a renewed focus on contingency planning, but also regulators. Supervisors in the UK and European Union have made it clear that financial institutions need to update their business continuity plans (BCPs) and operational resiliency arrangements to account for some of the longer-term risks that this pandemic poses.1

According to a Deloitte report, “The COVID-19 experience is showing that some of the most important threats that boards and senior management need to plan for are not always idiosyncratic. Large, systemic events that threaten the functioning of financial markets, or the economy as a whole, happen with sufficient frequency that they need to be taken seriously, even when crises become a distant memory.” The report further noted that, “Regulators will expect firms to plan for and build resilience to them.”2

Businesses have also learned that it is vital to quickly adapt when faced with a crisis. As COVID-19 lockdowns suppressed economic activity, VC and private equity firms were forced to change their investment approach. Patrick Malka, co-founder and partner at VC NewFund, said investment opportunities were limited initially, prompting the firm to refocus its teams by hiring more specialists to coach and support the existing start-up companies across its portfolios. “The support team is now bigger than the investment team,” he said.

COVID-19 has thrust some exponential long-term changes onto the private equity and VC sectors. While destabilizing, COVID-19 will likely result in the industry becoming more digital, better at managing risk, and healthier in terms of employee work-life balance.

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Sources

  1. Deloitte (May 14, 2020) COVID-19 and operational resilience in the financial sector
  2. Ibid.