Seven strategic private equity business trends to watch in 2021 - LEGAL SPEND WITH NO SURPRISES
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LEGAL SPEND WITH NO SURPRISES Seven strategic private equity business trends to watch in 2021 From diversity to digitisation: how people, process and technology are driving innovation in private equity
Contents
Introduction 4
Trend 1: LPs demand more transparency 5
Trend 2: Process improvement and technology are strategic priorities 7
Trend 3: Sharper focus on diversity and inclusion 9
Trend 4: Digitising both PE data and portfolio processes 11
Trend 5: The CFO as the champion of strategic innovation 13
Trend 6: PE firms feel pressure to reduce external legal spend 15
Trend 7: Cybersecurity is an increasingly important part of M&A due diligence 17
Final thoughts: constraints drive creative problem solving 19
About Apperio 20
Endnotes 22
2 Seven Strategic Private Equity Business Trends to Watch in 2021“ Businesses of all kinds are experiencing
two years’ worth of digitisation “
compressed into months.
Rex Salisbury, Partner (Fintech), A16z
3 Seven Strategic Private Equity Business Trends to Watch in 2021Introduction
Earlier this year, survey research showed most private equity (PE) investors
expected merger and acquisition (M&A) activity to slow. When asked
“Why?”, most respondents (93%) pointed to the Coronavirus pandemic.
However, it was not the only reason. PE firms also cited market volatility
(78%), geopolitical uncertainty (78%) and decreased valuations (68%).
Indeed, the drop off in deals “initially” rivaled the 2008-2009 financial crisis,
according to an analysis by the Boston Consulting Group. Yet a few months
later, PE-backed M&A deals topped 5,500 – the highest that’s been recorded
since 1980, according to the Institutional Investor, citing widely reported
data by Refinitiv.
Market conditions are still changing. As we write this, the pandemic is
resurging, geopolitical uncertainty remains, and the markets are still
volatile. As such, forecasts for deal-making range from frothy to distressed
opportunity – and from dry powder to overhang. So, exactly how the market
will perform over 2021 is anyone’s guess.
Even so, as observers of the private equity community, we’ve noticed several
underlying trends around people, process and technology. These trends
aren’t entirely new but have become heightened in 2020. Perhaps Mr.
Salisbury’s observation about the acceleration of digitisation may well extend
to them all.
4 Seven Strategic Private Equity Business Trends to Watch in 2021TREND 1
LPs demand more
transparency
Limited partners (LPs) are asking PE firms more questions, more often and
about a broader range of topics. That’s according to a report and survey of
124 respondents published by the trade publication Private Funds CFO.
LPs are going beyond asking the classic questions about operations, process
and controls – and extending into subjects including valuations, diversity, the
environment, technology, and cybersecurity. For example, close to 90% ask
about “cyber-attack readiness” policies.
5 Seven Strategic Private Equity Business Trends to Watch in 2021The person within the PE firm that LPs want to see during due diligence may
also be changing. About 16% of respondents say LPs always ask to meet the
CFO, while another 72% “sometimes ask”.
“During our latest raise, I had in excess of 60 meetings or calls with investors
on a variety of topics including operations, internal controls, economics, work
environment and culture of the organisation”, according to a CFO as quoted
in an article accompanying the report. “Ten years ago, other than processing
information, I was not meeting the majority of prospective investors”.
“ During our latest raise, I had in
excess of 60 meetings or calls with
investors on a variety of topics
including operations, internal controls,
economics, work environment and “
culture of the organisation.
The report finds a lack of standardisation among due diligence queries.
Many LPs send over comprehensive questionnaires, each with unique
questions and formats. The work of completion largely falls to the CFO and
their team. It seems to be an intensive and manual process that’s ripe for
digitisation and technology.
6 Seven Strategic Private Equity Business Trends to Watch in 2021TREND 2
Process improvement
and technology are
strategic priorities
Asset growth was the top priority for 71% of respondents to a poll of PE
firms conducted by EY. Fund managers are seeking to achieve growth by
raising additional funds and fielding alternative product lines.
While asset growth is an obvious goal since assets under management is the
heart and soul of private equity, it’s those that followed that stood out. The
survey found subsequent strategic priorities identified by respondents were
talent management (55%), enhancing back office-processes and technology
(43%) and cost management (31%).
7 Seven Strategic Private Equity Business Trends to Watch in 2021These focus areas go hand-in-hand since enabling technologies are geared
to streamline processes and lower costs. However, PE firms need talent
with technical skill sets to execute and gain the leverage technology can
provide. As the report notes, “The traditional workforce of private equity is
accustomed to Excel and firms need to train their people on the new systems
as well as adjust the profiles of new candidates as the technology landscape
continues to evolve”.
In terms of specific technology solutions, PE firms said the following
categories had the greatest return so far:
Accounts payable and Valuation (60%) Fund accounting (59%)
expenses (69%)
Treasury (58%) Data management
(56%)
Data and analytics are woven across these technology categories. More than
half of all respondents (56%) indicated their PE firm is “using next-generation
data and analytical tools”. The trendline was higher among larger firms. For
example, among PE firms with more than $15 billion under management,
some 69% said they had adopted data analytics tools.
8 Seven Strategic Private Equity Business Trends to Watch in 2021TREND 3
Sharper focus
on diversity and
inclusion
Diversity and inclusion have come into sharp focus in 2020. Anna Grotbert,
an associate partner at EY-Parthenon, says she is seeing “increasing
demand” among LPs asking for transparency around ESG policies and social
issues in particular, according to S&P Global Market Intelligence.
“We’ve had movements like Occupy Wall Street and continued pressure on
inclusive capitalism and we’ve seen private equity come into the limelight
from a regulatory perspective and really force the topic of transparency and
purpose”, she added.
9 Seven Strategic Private Equity Business Trends to Watch in 2021Survey data from the Private Funds CFO Insights 2020 report supports Ms
Grotbert’s thesis. It found about 70% of LPs “delve” into private equity’s
use of environmental, social and governance (ESG) initiatives with some
frequency.
To their credit, many PE firms are striving to address the issue. “More than
three-quarters of private equity firms are taking proactive steps to increase
diversity”, according to the 2020 Global Private Equity Survey by EY. Those
steps haven’t yet had the desired impact. For example, less than one in three
“front-office roles” are filled by women. So, while the EY report recognises the
work PE firms are doing in diversity, it also notes “more needs to be done”.
More than three-quarters
More than
of private equity firms are
75% taking proactive steps to
increase diversity.
Although, less than one in
three “front-office roles” are
filled by women.
The Boston Consulting Group (BCG) sees a leadership opportunity for the
private investing community because of its outsized impact on employment.
The consulting firm points out PE firms tend to be nimble organisations that
can drive change both within their organisation and among their portfolio
companies.
PE firms are taking steps to improve diversity, which include: more recruiting
from a broader group of academic institutions (51%), establishing in-
house diversity groups (37%), seeking out candidates from non-traditional
backgrounds, such as other than finance (35%), and building formal
mentoring programs (28%).
10 Seven Strategic Private Equity Business Trends to Watch in 2021TREND 4
Digitising both PE
data and portfolio
processes
An overwhelming majority of PE firms are turning to digitisation. Some
“84% of respondents say they will invest in digitalisation over the next year”,
according to a global survey of 250 PE principals commissioned by PwC and
conducted by Mergermarket.
Digital assets can be analysed and PE firms will use data and analytics to
“source more and better deals but also to expedite holding periods, increase
the value of portfolios and create industry leaders and disruptors”. Some
95% say they already “have used analytics in their own work to identify
potential deal opportunities”.
11 Seven Strategic Private Equity Business Trends to Watch in 2021Digitisation surfaces again later in the report when it turns to assets and
equity stories. A majority of respondents (84%) agreed “that digitising
portfolio companies will expedite equity stories”.
To be clear, there are certainly other factors contributing to equity stories,
such as market consolidation and operational synergies, according to one PE
leader cited in the report. However, digitisation “is another really important
factor which cannot be ignored, and we look forward to applying and
integrating digital technologies into business functions”.
About half (52%) of respondents said digitisation has improved their return
on investment (ROI) over the last three years. The trend shows no signs of
slowing either. The findings indicate PE will put “digitisation on an even
footing with operational enhancements”, moving forward.
Of respondents say they already have
95% used analytics in their own work to identify
potential deal opportunities.
84%
Of respondents say they will invest in
digitalisation over the next year.
Of respondents said digitisation has
52% improved their return on investment (ROI)
over the last three years.
12 Seven Strategic Private Equity Business Trends to Watch in 2021TREND 5
The CFO as the
champion of
strategic innovation
CFOs could well be the secret weapon to modernising processes and
technology within PE firms. The study by EY found CFOs are being “charged
with helping their organisations make informed decisions as they move into
this unprecedented age of asset growth and product expansion”.
The findings show CFOs at PE firms would prefer to spend less time
on traditional operations functions like fund accounting and regulatory
compliance, in favor of spending more time on strategic duties such as
portfolio analytics and technology.
13 Seven Strategic Private Equity Business Trends to Watch in 2021Strategic time allocation of CFOs in PE firms
Around 40% would prefer to spend Around 70% would prefer to spend
less time on routine functions like: more time on strategic duties such as:
Fund accounting Regulatory Portfolio analytics Technology
compliance
There’s more than just a desire in this trend – CFOs are spending more
time on strategic tasks outside of the traditional financial purview. Those
range from helping to prepare fundraising materials (68%) to cybersecurity
oversight (48%) to scenario modeling and economic forecasting (43%).
CFOs also have a critical role in helping PE firms fuel asset growth. For
example, in rolling out new product lines, CFOs are typically involved in
assessing “potential compliance issues (73%) to analysing potential tax issues
(73%) as well as hiring talent (63%) to oversee new products”.
All this is “very well-connected to talent because, clearly, with that expansion
in AUM, the operating model, talent, technology and process are very
important to scale and take on the additional capital”, said Mike Lo Parrino,
Private Equity Leader for the Financial Services Organization at EY Americas,
in a podcast about the survey.
The EY report says, “private equity CFOs are also leading the effort to find
ways to deploy innovative new technologies” and they “overwhelmingly
expect their finance team to spend more time on technology and investment
portfolio analytics over the next two years”.
14 Seven Strategic Private Equity Business Trends to Watch in 2021TREND 6
PE firms feel
pressure to reduce
external legal spend
About four in five PE firms feel increased pressure to reduce the amount
of money spent on external legal counsel. A report, based on a survey of
100 legal stakeholders at PE firms across the US and UK with an average of
more than $10 billion under management, found the level of scrutiny being
applied to outside counsel costs has skyrocketed over the last few years.
Many cite the dip deal flow took in wake of the pandemic as the catalyst for
scrutiny, but it wasn’t the only reason. Among the contributing factors driving
cost pressure on legal spend were an increase in other costs (87%) and the
introduction of procurement skills (65%).
15 Seven Strategic Private Equity Business Trends to Watch in 2021There’s money to be saved too. For example, US-based PE firms spend
on average $10.5 million on outside counsel annually and the typical M&A
transaction costs $353,000 in legal fees. Finally, the average legal cost, as a
percentage of a fund raised, is 4.7%.
While PE firms say they trust and value the legal counsel they receive from
their law firm partners, the business of law has room for improvement.
Specifically, the accuracy, timeliness, and transparency pursuant to law firm
invoicing leaves much to be desired.
Legal stakeholders also concede their organisation could do a better job
of managing legal spend. Four in ten legal stakeholders indicated their
organisation does not currently make efforts to manage legal spend. Further,
the vast majority (91%) are still collating and analysing billing data in old-
fashioned spreadsheets.
Four in ten legal stakeholders indicated their organisation does not currently
make efforts to manage legal spend.
The vast majority are still
collating and analysing
91% billing data in old-fashioned
spreadsheets.
16 Seven Strategic Private Equity Business Trends to Watch in 2021TREND 7
Cybersecurity is
an increasingly
important part of
M&A due diligence
Cybersecurity has become an increasingly important part of due diligence
in M&A. No investor wants to discover a problem like a major breach after
a deal has closed – but disclosure could risk derailing a deal or lowering the
valuation.
This was a situation facing Yahoo as it was being acquired by Verizon. Yahoo
was compelled to trim 7% off the acquisition price after it discovered and
disclosed two high-profile data breaches, according to a report by PwC.
17 Seven Strategic Private Equity Business Trends to Watch in 2021The consulting firm compiled data that suggests this wasn’t an anomaly. For
example, about 80% of respondents to a 2017 survey by Donnelley Financial
Solutions and Mergermarkets said they discovered data security issues in
about a quarter of their deals over two years.
The trend isn’t new since the volume of security breaches and incidents
continue to grow as businesses have migrated online. Further, it may
accelerate because, in light of the pandemic, businesses are more accepting
of remote work – and even rolling out permanent remote work policies.
With remote work comes cybersecurity risk. For example, “between March
and April, when many companies were moving to remote work, there was an
increase of between three and five times in the number of breaches reported
to the firm”, according to research by Blake, Cassels & Graydon LLP, as cited
by Canadian Lawyer magazine.
“ The trend isn’t new since the volume
of security breaches and incidents
“
continue to grow as businesses have
migrated online.
Imran Ahmad, a partner with the firm, who specialises in investigating
cybersecurity incidents, told the publication the volume has remained at that
high level and reflects what the firm has heard “globally”.
18 Seven Strategic Private Equity Business Trends to Watch in 2021Final thoughts:
constraints drive
creative problem
solving
It is said in wartime medicine takes a quantum leap forward. If trauma
healing can advance during the stress and chaos of battle, then perhaps
it’s not unlimited resources that drive creative thinking and innovation, but
constraints.
The last ten months or so have brought unusual constraints associated with
uncertainty and volatility. Still, there’s value to be found in the way it has
refocused our emphasis on people, process and technology. To that end,
we trust you’ll find a return on the attention you’ve invested in these seven
strategic private equity business trends to watch in 2021.
19 Seven Strategic Private Equity Business Trends to Watch in 2021About Apperio The Apperio legal spend management platform is specifically designed for in-house legal and finance teams. With ever-increasing scrutiny over how clients’ funds are spent, Apperio helps PE firms to simultaneously manage multiple law firms and large projects, track day-to-day legal spend against budgets, improve the efficiency of their team and spend, and safeguard regulatory compliance. Apperio uniquely connects directly to law firms’ practice management systems to provide a live view of all matters, including unbilled work-in- progress and invoiced matters. Unlike eBilling solutions, which only provide visibility of invoiced matters that may have a lag of several months, Apperio provides instant visibility of both historic and unbilled legal spend data. 20 Seven Strategic Private Equity Business Trends to Watch in 2021
This transparency benefits both parties, with clients having greater
confidence in their advisors’ billing practices, and law firms experiencing
fewer write-downs or payment delays that disrupt cash flow. In addition,
Apperio removes a significant administrative burden on both sides by
reducing the need to share data using imprecise telephone updates and
manually collated spreadsheets sent over email.
Apperio exists to make the global legal industry clear, connected and
collaborative. Its founders understood how commercial trust between
in-house legal teams and external counsel was suffering because of a
fundamental lack of transparency. Today, Apperio is transforming how legal
departments are run, starting with the most important thing when running a
department - knowing how much you’re spending.
To book a demonstration of the platform and understand how Apperio could
help manage your legal matters and reduce your spend, visit www.apperio.com
and click ‘Find out more’. Or simply email us at info@apperio.com.
21 Seven Strategic Private Equity Business Trends to Watch in 2021End notes 1. 2020 Global Private Equity Survey, EY, 2020. Available at: https://www.ey.com/en_us/private-equity/is-your-next-step-about-changing-direction-or-directing-change 2. COVID-19 accelerating purpose and responsibility trend in private equity, S&P Global Market Intelligence, 2020. Available at: https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/covid-19-accelerating- purpose-and-responsibility-trend-in-private-equity-60673464 3. Cybersecurity due diligence becomes focus in M&A transactions, Canadian Lawyer, 2020. Available at: https://www.canadianlawyermag.com/practice-areas/privacy-and-data/cybersecurity-due-diligence-becomes-focus- in-ma-transactions/334412 4. ESG considerations for private equity firms, PwC, 2016. Available at: https://www.pwc.com/sg/en/publications/assets/esg-considerations-for-private-equity-firms.pdf 5. Private Equity Funds Are Making Record Numbers of Buyout Deals, Institutional Investor, 2020. Available at: https://www.institutionalinvestor.com/article/b1nlyzpdk3m27h/Private-Equity-Funds-Are-Making-Record-Numbers- of-Buyout-Deals 6. Private Equity Trend Report 2020, Mergermarket and PwC, 2020. Available at: https://www.mergermarket.com/info/private-equity-trend-report-2020 7. Private Equity’s Chance to Stand Up for Diversity and Inclusion, Boston Consulting Group (BCG), 2020. Available at: https://www.bcg.com/en-us/publications/2020/private-equity-can-stand-up-for-diversity-inclusion 8. Private Funds CFO Insights 2020, Private Funds CFO, 2019. Available at: https://www.privatefundscfo.com/insights-2020/ 9. Rocketing scrutiny, eroding trust: The changing PE legal spend landscape, Apperio, 2020. Available at: https://info.apperio.com/the-changing-pe-legal-spend-landscape.html 10. Roundtable: CFOs take center stage, Private Funds CFO, 2019. Available at: https://www.privatefundscfo.com/roundtable-cfos-take-center-stage/ 11. The 2020 M&A Report: Alternative Deals Gain Traction, Boston Consulting Group (BCG), 2020. Available at: https://www.bcg.com/en-us/publications/2020/mergers-acquisitions-report-alternative-deals-gain-traction 12. Venue Market Spotlight | Cybersecurity, Donnelley Financial Solutions, 2017. Available at: https://www.mergermarket.com/assets/DFS%20Spotlight_September%202017_Final.pdf 13. When cyber threatens M&A, PwC, 2020. Available at: https://www.pwc.com/us/en/services/deals/cyber-threats-to-mergers-acquisitions.htm 22 Seven Strategic Private Equity Business Trends to Watch in 2021
Contact us Email: info@apperio.com Tel: +44 (0)20 3778 0024 www.apperio.com
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