Private Equity firms must embrace the MENA digital revolution, says PwC

As the digital revolution in the Middle East marches on, private equity firms will need to move with the times to remain relevant, says a survey report from PwC. 

In a market survey with a number of leading private equity (PE) houses in the Middle East, the Big Four accounting and advisory firm PwC has found that 80% of respondents believe that digitisation is ‘critical’ for the future readiness of their companies. To put this in context, just 62% of their European private equity counterparts previously surveyed believed that digitisation would deliver ‘sustainable value’ – although it was cited as the most important local trend influencing decisions.

And while ‘going digital’ features prominently in terms of investment decision-making and value creation planning for all of the Middle Eastern firms surveyed – some 90% of which are already in the process of digitising at least one of their portfolio companies – the firms remain cautious when it comes to initial investments and are unlikely to be early adopters of emerging technologies.

In this regard, the PwC report points to capital constraints and holding periods. As investors typically look to offload assets after a three-to-five year term, PE houses will take a moderate approach to digitisation to safeguard their investment, ensuring that solutions have been tested prior to commitment. Here, the report notes that, “The risk and costs of testing a very innovative solution will probably exceed the expected return in their typical time horizon.”

The Middle East, however, with its generally young demographic and quality infrastructure already in place is charging ahead in its digital advance. The consulting firm cites Bahrain, Kuwait and the UAE as examples of high levels of technology adoption by consumers in the region, with mobile subscription rates of over 90% marking the countries as among the most penetrated in the world.

And the digital disruption at a commercial level is already evident across almost every industry, with, for example, the rise of e-commerce giants and the fintech market changing the face of the retail and financial services sectors, along with AI and robotics in healthcare and customer data capture for fast-moving consumer goods (FMCG) enterprises.

As such, those who fail to adapt to these rapid changes are at risk of being left behind, warn the report’s authors. They state; “Overall, our survey suggests that PE houses recognise that they are at a crossroads here. They must balance the risks of adopting new technology against the opportunities it offers and the danger of failing to build the exit equity story.”

The move to adapt

Indeed, nearly three quarters of the PE houses surveyed now focus on a company’s digital maturity in assessments prior to acquisition – both as to the impact of digital in terms of opportunity as well as the potential for disruptive competition, and also at how digitisation could be used to optimise costs and/or revenues. Further down the line, 95% of the respondents consider digitisation as an important factor for exits and returns on investment. 

All in all, PE firms will have to increase their focus on the exit phase with regards to digital considerations before they make an initial investment. “Complacency is no longer an option. When you prepare to exit, you must already be digital. The digital revolution is already having a profound impact on the PE ecosystem, and there is no choice now but to embrace it,” the report, led by Erwan Colder, Middle East Transaction Services and Private Equity Leader, contends.

“Having a digital strategy is essential for ‘future proofing’ a company that wants to retain market share and stay ahead of the competition. Those who are nimble will reap the benefits of the value to be created through digitisation,” it says in conclusion. “The digital revolution has changed the way products and services are consumed. As the market continues to adapt to consumer demand, PE firms and portfolio companies must remain relevant by mirroring consumer behavior”.