Business and profit optimization is at the forefront of any Private Equity investor and management team dialogue. As noted in our recent Private Equity Industry Report, the record amount of M&A activity in 2021 may certainly lead to even more scrutiny surrounding post-acquisition integration and portfolio optimization through the use of technology, systems and process improvement. For Private Equity funds and portfolio companies, a digital transformation strategy can be an essential component in optimizing investment performance, profitability, and value.
In this episode of The Drawdown, we examine what digital transformation means from the perspective of a Private Equity fund and its portfolio companies, why a “digital strategy” is increasingly replacing a “digital project” mindset, and how effective strategies can increase integration success and improve ROI upon exit. Topics covered in this episode include:
- What is digital strategy for Private Equity?
- Things to consider in developing a digital strategy
- Practical application: a portfolio company case study
- How digital strategies improve ROI
- Outlook on US middle-market Private Equity and digital transformation
View All The Drawdown Podcasts
CAMERON SMITH: Welcome to The Drawdown, a podcast by Cherry Bekaert's Private Equity Practice. I lead business development and client service for Cherry Bekaert's Private Equity Practice.
CAMERON SMITH: Today's episode will dig into digital transformation for middle-market private equity. We've been spending more time working with funds and portfolio companies on digital projects, and the conversation with clients is evolving into digital strategy.
CAMERON SMITH: I'd like to welcome some Cherry Bekaert colleagues who are in the digital weeds daily. Nita Sanger is a director in Digital Transformation and Innovation with 25 years of experience helping private equity funds and portfolio companies create digital strategies to facilitate growth and optimize operations. She spent 14 years in Big Four accounting and is the former head of global innovation for an international legal services firm.
CAMERON SMITH: Dan Hewlin is a director in Systems and Processes with over 30 years of experience in global IT and digitally enabled organizations. Dan leads Cherry Bekaert's digital diligence and post-close integration team, focusing on IT, system migrations, and optimization strategies for private equity.
CAMERON SMITH: Steve Holliday is a director on our Fractional CIO and COO Services team. He is the former Chief Information Officer of a $700 million publicly traded manufacturing company and has over 30 years of IT operations and business process improvement experience. Steve is a Certified Information Security Manager and a Lean Six Sigma Master Black Belt. Welcome, Steve.
CAMERON SMITH: I want to hear more from this experienced group. Let's dig into digital for private equity. Nita, in Cherry Bekaert's recently published U.S. Middle Market Private Equity Report, you said that by optimizing portfolio companies with digitalization tools and strategies, private equity funds can accelerate profitability and growth. What does that mean? What is digital strategy? What does it entail—technology, systems, software?
NITA SANGER: When we talk about digital strategy, we mean business strategy enabled by technology and data. Private equity firms invest expecting high growth potential and pursue different acquisition strategies, such as platform plays and rollups or adding adjacent services.
NITA SANGER: From the company's perspective, after acquisition you examine how to achieve the expected revenues. Business strategy enabled by technology and data involves understanding your clients, how you target them, your go-to-market approach, and the customer experience you provide.
NITA SANGER: It also covers your products and services—whether it's a software-as-a-service model or another model—and how you operate. In operations, you look for opportunities to optimize processes, use technology to streamline operations, and consider managed services or fractional talent instead of full-time hires.
NITA SANGER: Digital strategy requires examining these aspects and using technology and data to meet customer needs more effectively, make people more effective, and improve business operations. Technology is the enabler of change, not the driver, so you must take a holistic view.
CAMERON SMITH: Dan, you and I have worked on many projects—IT, cyber, business process, ERP implementations. Middle-market private equity often treats technology as strategic but also as project-based. How do those concepts merge? Is project-based digital work the foundation, moving toward an overall strategy like Nita described?
DAN HEWLIN: Typical work in a private equity setting follows the acquire, optimize, realize lifecycle, and firms need to accelerate that timeline. PE firms want to realize value in three to four years, not stretch to seven, so speed matters.
DAN HEWLIN: We start tactically, often with due diligence across a company's systems—ERP, proprietary software—assessing scalability, quality, and technical debt. Then we lay out a preliminary investment plan over two to three years to professionalize the organization and position it for growth.
DAN HEWLIN: The first step is getting the right people in the right seats—from CEO to marketing and HR—aligned with the PE firm's goals. Then, optimization involves tactical work like evaluating ERP and financial systems, integration, and data.
DAN HEWLIN: For product companies, going to market online and leveraging platforms like Amazon or Walmart may be critical. Integration and data allow you to recognize market opportunities, understand customer interactions, and inform pricing and placement.
DAN HEWLIN: Ultimately, you're positioning systems to accelerate add-ons. If core systems aren't ready, acquisitions won't integrate well, resulting in disparate systems that hinder a high-multiple exit. Companies not innovated by technology, business process, and automation won't be differentiated and may miss exit timelines important to PE firms.
CAMERON SMITH: Steve, you have a recent example of a portfolio company using both strategy and tactical execution. Would you describe that aerospace company you're helping?
STEVE HOLLIDAY: We worked with a PE fund on a pre-acquisition operations due diligence for a target in the aerospace industry. After acquisition, the company acted on guidance and selected an ERP platform to improve business processes. They engaged us for operational improvements and broader technology strategy.
STEVE HOLLIDAY: Our work covered ERP, IT infrastructure, and cloud, which supported their CMMC—Cybersecurity Maturity Model Certification—requirements and scalability needs. We also implemented operational metrics for the shop floor to improve yield, efficiency, and machine capacity utilization.
STEVE HOLLIDAY: We've been on the ground for almost a year and expect to continue in a fractional capacity into next year.
CAMERON SMITH: That digital strategy created value at the portfolio company level and rolled up to the fund. Let's talk about value creation and ROI. Nita, how can a middle-market private equity fund view digital strategy as an EBITDA generator instead of a cost center?
NITA SANGER: Everything we suggest focuses on helping the company achieve high returns. Digital strategy supports both organic and inorganic revenue growth. For inorganic growth through add-ons, you must assess existing systems and processes to ensure effective integration of acquired companies.
NITA SANGER: If technologies and processes cannot integrate seamlessly, you may not achieve expected returns. Statistics show many deals fail to realize anticipated value because integration and digital optimization are neglected.
NITA SANGER: For organic growth, digital strategy helps you serve clients more efficiently, expand market reach, and reduce customer acquisition costs through digital methods rather than relying solely on salespeople. You also make processes more efficient and empower people with technology to improve productivity.
NITA SANGER: Overall, digital initiatives focus on top-line growth and margin improvement, making them EBITDA-driven rather than merely cost centers.
CAMERON SMITH: Dan, your thoughts on cost versus return?
DAN HEWLIN: In diligence, we see many middle-market companies—often $20–60 million in revenue—with fragmented technology and limited integration. Budgets for IT commonly range from 1.5–3 percent of revenue, while companies excelling in technology often spend around 8 percent. Software companies driving product innovation can spend up to 20 percent.
DAN HEWLIN: For a $20 million company, 8 percent is $1.6 million in IT spend. PE firms must recognize that scaling requires investment. The returns are significant: companies with strong digital marketing, integrated systems, and automation command higher multiples on exit.
DAN HEWLIN: Automation reduces errors and waste. In law firms, for example, robotic process automation reduces errors and malpractice risk. These improvements materially impact the bottom line and multiples in a PE context.
CAMERON SMITH: Steve, for the aerospace manufacturer, how is that client looking at ROI?
STEVE HOLLIDAY: Our operational effectiveness engagement baselined machine utilization and process yields and provided two perspectives. First, cost savings from improved yields and reduced overtime. Second, additional business opportunity from freed capacity, which can be harder to realize without target-driven growth.
STEVE HOLLIDAY: Depending on business maturity, cost improvements alone can justify investments, and growth from freed capacity is additional upside. In this case, operational improvements in yield and productivity justified the investments.
CAMERON SMITH: It's interesting to hear middle-market private equity looking beyond acquisitions and sales to deeper value creation, especially after the record volumes in 2021 that increased integration and return pressures. In the report we predicted that middle-market PE funds will increase focus on digitalization and portfolio optimization to generate better returns for funds and LPs. Nita, your crystal ball prediction?
NITA SANGER: We'll continue to see significant middle-market private equity activity, especially in industries transforming rapidly, like healthcare and industrial sectors influenced by the infrastructure bill. PE will invest in transforming sectors, but firms must also focus on optimizing and digitally transforming acquired companies to achieve returns quickly and exit sooner.
CAMERON SMITH: Dan?
DAN HEWLIN: With many deals completed in 2021, there's pressure on portfolio companies to deliver returns. Many deals fail to achieve their thesis due to slow starts, limited resources, and poor execution. I foresee PE firms asking us to optimize portfolio companies, identify outsourcing opportunities, and integrate data to provide insights on customers, web presence, supply chains, and HR systems. There will be strong demand for value creation support.
CAMERON SMITH: Steve, final thoughts?
STEVE HOLLIDAY: There's tremendous opportunity as mom-and-pop owners retire and businesses are acquired. Many of these companies have underinvested in technology, which can be an advantage today. Technology has become more affordable and capable, allowing richer digitalization of business processes and real-time operational data that drives better yields and productivity. The opportunity is substantial.
CAMERON SMITH: Thank you, Nita, Dan, and Steve. This topic continues to evolve with our clients.
CAMERON SMITH: I'm Cameron Smith. From all of us at Cherry Bekaert, we wish you well.
ANNOUNCER: Thank you for listening to The Drawdown, Cherry Bekaert's Private Equity Podcast. The views presented by our guests do not necessarily represent the views of their respective firms. For more information on how Cherry Bekaert serves private equity funds and their portfolio companies through accounting, tax, and advisory services, please visit cbh.com.
