Are you leveraging all potential benefits of ERPs in your PE firm?


While merger & acquisition transaction volumes will always rise and fall, a few underlying factors remain constant. Buyers and sellers need to actively manage risk and complexity, meet expected timelines and control transaction costs effectively so that the deal value is realized. According to a report by CVCA, 544 private equity deals have been closed for a total of $22.4 billion in Canada in 2018.

In this context, corporate executives continue to assess their business unit portfolios to identify segments that are no longer strategic as well as opportunities to drive growth through acquisition into new customer, product or geographic segments. Financial sponsors continue to seek new opportunities to deploy capital as well as exits for long-held assets.

Having line of sight into the performance of the private equity firm and its portfolio companies is a key success factor in managing a successful private equity (PE) firm today. Modern enterprise resource planning (ERP) systems can provide that much needed access to information.  

As a reminder, ERP integrates all the business processes to run a company in one system and provides a 360-degree view of your business in real time.

Some think of ERPs as large, all-encompassing solutions that take one or two years to implement, and require substantial in-house computing skill and equipment. And yes, those solutions are still available.

In the last decade, the development of cloud computing has allowed the emergence of a new generation of ERPs. They are more intuitive to implement, do not require any maintenance and do not need upgrades that can be costly for any organization. In addition, they provide more flexibility as firms can implement only the modules they require and add additional modules to manage operations better when scaling up the business. Examples could be human capital management (HCM) and client relationship management (CRM).

Yet, the PE industry has by and large been slow to adopt new ERP technology, compared to many sectors.

In this article, we discuss some of benefits of ERPs, which come in two main ways:

  • Operational improvements through ERPs within the PE firm itself, and
  • Benefits related to the portfolio companies held by the PE firm.

Operational advantages for the PE firm itself

As the private equity industry reaches maturity it has become increasingly difficult for private equity firms to get ahead of the competition. However, in an effort to get a leg up, many private equity firms are turning to technology. The strategy makes perfect sense: technology is known for creating efficiencies and streamlining processes in many industries. That said, while private equity is adopting technology, the process has been slower despite the fact that various technologies could help generate out-sized returns that limited partners have come to expect.

One of the best ways for a PE firm to compete successfully is through technology - by allowing the leadership team to stay out of the operational weeds and instead focus on the mission of the organization. The best way to achieve this, is by having real-time and accurate data to make informed decisions. An ERP that meets your business needs can achieve just that.

Most private equity firms are working with analysts that run and analyze data to get reports from every portfolio to investors, partners, and bankers. Sometimes, spreadsheets may have 40 tabs with 10 to 15 metrics to track. By the time these reports are sent, every week, every month, every quarter, two questions remain: how old is the data and is the data accurate?

Today’s technology and systems make it easier to access this data in real time with no errors. It is also becoming cheaper, quicker, faster to deploy business applications, bringing a lot a value, and increasing adoption accordingly.

There are also aspects of ERPs that are unique to PE firms. In many other sectors, the CRM features of an ERP are used to nurture sales leads. In a PE firm, they serve an equally essential function – nurturing the ecosystem of contacts including bankers, brokers, lawyers and accountants who have the potential to funnel deals to the firm. An ERP helps to ensure that each person in that ecosystem receives the right kind and level of contact from the firm to keep those relationships alive.

ERPs can help with other aspects as well, including providing warning if a portfolio company is having problems that need attention. This is far from being a stock-trading app on a phone that alerts the leadership that it is “time to sell” but the reports that the ERP generates can be configured to flag potential problems. Those flags can include the usual financial ratios, sales figures, operating costs and other key indicators.

Having easy access to real-time data allows PE leadership to shift focus from the process of gathering this type of data, towards acting on the up-to-the-minute current data that’s been displayed on the computer monitor.

Being able to generate reports on-demand gives confidence to the stakeholders that the firm is being run smoothly and efficiently – and that the performance of their investments is closely monitored to take corrective actions promptly or get ahead of opportunities for improvement. It also supports negotiations with business partners that the firm is approaching for capital input.

Helping portfolio companies succeed through ERPs

Another way that ERPs are impacting the PE sector is through the systems being used – or not used – to run the portfolio companies.

This starts with the early stages of the acquisition process, when the PE firm requests financial data from a potential target. If that target is able to generate accurate reports on sales, inventory, current value of equipment on premises, payroll costs and other expenses, in a timely-manner, it is a sign that the company knows where the money is invested and the people are focusing their effort. Such figures are most likely to be available on-demand if the target company has an active and well-operated ERP.

If the target company takes weeks to provide the most basic of financial information, that is also a sign. It could indicate that the current management has under-invested in technology, which may be the case elsewhere within the company as well. It can also be a sign that for a modest investment in an ERP system, the target company’s performance can be substantially improved.

A question often asked is whether it is best to have the portfolio companies managed through the same ERP that the PE firm uses. In many cases, the PE firm does not have the bench strength or the detailed knowledge to configure the ERP to meet the informational needs of each company in the portfolio. It is generally better to have each portfolio company provided with its own ERP solution, with the PE firm having easy access to the data in those systems.

That way, if and when it comes time to sell, the ERP can be used to generate real-time, detailed data that will satisfy a potential buyer. The ERP remains as one of the assets of the company being considered for sale.

In short, ERPs can go a long way to improving the smooth operation and profitability of a PE firm, and also improve the operational efficiency of the companies in its portfolio.

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