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PE and the 4th Industrial Revolution: The new deal

The Fourth Industrial Revolution has arrived
Private equity must tap into companies at the forefront of the Fourth Industrial Revolution
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As the Fourth Industrial Revolution continues to gain momentum, the buyout industry is taking an increased interest in technology-heavy and digitally-driven companies. In the third instalment of our series, Mikkel Stern-Peltz examines PE investment in digital economy companies

Click here to visit our content hub and read the first two instalments of our series on private equity and the Fourth Industrial Revolution

In the first months of 2016, EQT acquired Danish software company Sitecore in a deal that valued the company at €1bn, while Polaris completed its first ever buyout of a software company when it bought manufacturing software developer Configit.

GP Bullhound co-founder and managing partner Per Roman says private equity is an increasingly active counterparty in the GP's tech M&A business, driven in particular by two trends: "One is that non-European investors of all stages have increasingly started to invest in the European tech market, and the other is that private equity funds based in Europe are spending a lot of time today looking at technology assets and buying technology assets.

"You can always find an exception, but the private equity industry is starting to view the technology sector as a viable sector to invest in. It also recognises that technology is a horizontal layer that touches every industry, and that within technology it can be anything from enterprise-focused, to consumer-focused, hardware, software, to e-commerce - it's not really a sector but a way of doing business."

The good private equity firms are trying to protect themselves against disruption" – Haakon Overli, Dawn Capital

As private equity firms begin to recognise technology as a sector-spanning approach to business and not an industry in and of itself, GPs are also realising the need for specialist knowledge and dedicated teams. "The good private equity firms are trying to protect themselves against disruption," says Dawn Capital founder Haakon Overli. "We're talking to a select number of large corporates about how they can set themselves up to have much better information about these developments, which is a huge issue for many now."

Polaris's buyout of Configit was a direct result of a concerted effort to build a technology and software-focused knowledge base within the GP, in the form of a dedicated three-person team and an external network of industrial advisers.

"The reason we set up our in-house software and technology team was because we gradually came to the conclusion that there has been an evolution in the industrial structure, where more and more companies with a tech or software angle are appearing," says managing partner Jan Johan Kühl. "It's becoming a fundamentally larger part of our business environment and it's important that we, as a generalist fund, ensure we are able to meet these companies that increasingly appear. We concluded we cannot do that without a deep understanding of these sectors."

Recruiting for the revolution
The drive to build competencies and expand GP knowledge of the new digital economy is also being seen in how the industry hires new talent. Charlie Hunt, principal consultant at private equity recruitment firm PER says there has been a seismic shift in how the industry hires over the past three-to-five years, as a direct result of the Fourth Industrial Revolution.

Generalist private equity funds are increasingly hiring professionals with backgrounds in venture capital or technology-focused funds because of their understanding of the omnipresence of technology. Advisory professionals with a track record of advising on deals for tech assets are also being poached, according to Hunt. "At the partner level, firms are hiring from the bigger groups and tech funds, so people are moving up the scale - from growth funds to private equity, for example," he says.

While there is a drive to bring in more tech expertise, firms are not completely shunning more traditional attributes, says Hunt. "If a fund wants to do a buyout of a tech business or a big strategic tech growth play, the generalists will still want the modelling experience and core skillset they've always looked for, but now they also look for it in someone who is obsessed with technology."

It's always a good idea if you can lead from the front. It's very hard to be involved in companies and recruit people if you're not leading a little bit by example" – Johan Bygge, EQT

However, generalists looking to pick up top tech talent will also need to display real commitment to investments with a Fourth Industrial Revolution angle in order to compete with increasingly large VC and growth funds. Says Hunt: "I think the buyout firms looking to attract that sort of talent need to do more deals in the space and be seen investing in really exciting growth plays or previously venture-backed businesses."

EQT's chief operating officer Johan Bygge shares this sentiment: "It's always a good idea if you can lead from the front. It's very hard to be involved in companies and recruit people if you're not leading a little bit by example."

EQT is among the major European private equity players implementing a technology and digitalisation strategy at a rapid pace. In addition to building a team and raising a dedicated venture fund, the GP has also hired a number of technology-focused professionals to drive future-proofing within the organisation itself. Bygge says the strategy has been a gradual change at EQT over the past few years, driven by managing partner Thomas von Koch.

Leading the push is Olof Hernell, a veteran of Google's Nordic operations, and the first head of digitalisation at EQT: "Olof is working on a couple of things: digitalisation and the development of a competence centre," says Bygge. "Digitalisation and tech will alter the business model a lot in a number of businesses and industries that we are involved in. In order for EQT to benefit from this, we are internally establishing a competence centre that is accessible to our industrial advisers and portfolio companies to query."

Further reading

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