Big Exits Demand Better Product and Technology Execution

Private equity firms have mastered financial arbitrage. But when software is the product, value creation depends on how fast you can modernize and integrate.

Video Transcript

Philippe Bonneton

Building upon what we discussed on Monday, the PE world, and what’s happening there, and what I took away from our conversation were three shifts. One, there’s a big move towards PE ownership. It’s more and more of the buyouts that we see are driven by private equity. There is a sort of race to the top and to how big you can get. So the platforms are getting consolidated and you’re starting to deal in the PE world with bigger and bigger and more complex conglomerates and roll-ups of companies. And where the financial playbook, the financial arbitrage playbook was really the name of the game traditionally. Now it’s moving much more towards product and software execution as the way to drive value or to a lot of these PE firms have value creation teams now or entities that are very much focused on, okay, it’s not just going to be cost cutting, rationalization, rip and replace. It’s going to be we need to make sure that we drive growth, that we expand the product set, that we adopt new technologies and so on.

And so that’s what I took away as the three shifts that are happening in the PE world. And where I think LiminalArc is super relevant to help play there because the big dilemma or the big chasm to cross there is if you’re a PE firm and you’re acquiring assets, you’re acquiring companies, you have your portfolio companies, something we’ve talked about before, when you acquire them, they’ve been very successful at getting to point a right? Getting to a place where they were valuable to you as a private equity company. Now, the team that’s in place, the products that are in place, the infrastructure underneath that was what took that company that you acquired two point A. As a private equity firm, you look at it and you have a business plan, you have a business case that you say, I want to take it to point B. What does it take? Point B is not just financial arbitrage anymore. Point B is all of these things I talked about.

Mike Cottmeyer 

Yeah. Well, I think to some degree, I think what we’re really going for is that you start to, as these companies roll up and roll up and roll up, at some point in time, a large private equity firm gets caught holding the bag. And there’s only so much that you can get in economies of scale, and you just have to start looking at combined product offers, integrated services, technologies that work together. We have to be able to add new features, capture new markets, much like that. And what I think we’re seeing in a lot of our clients and just generally in the marketplace is that the software that these companies run on is often not great. It’s often not easy to change. And now we combine multiple entities and we want to build combined feature sets. And you start asking yourself the question, how are we going to do that without creating a total mess?

You were talking about the idea of rationalization. I think rationalization is actually part of it, depending upon how you use the word. And so things that are common and can be used across the companies should be collapsed into a single thing. And that’s how I see rationalization. That’s how I’ve used the word, right? So that’s real, but how are you going to do it when every company has some version of some sort of legacy software, legacy monolith that they can’t untangle, unpack, decompose, that kind of a thing. And so what our hypothesis is in this space is that if we can find those value props that they want to exploit, look across the software ecosystem, figure out what components across that ecosystem to extract, rationalize, combine, rewrite, whatever, and then start organizing around it. We actually get the merger part of the mergers and acquisitions side of it. I think what you’re alluding to in the old playbook is that there’s a lot of merging of the business, but not necessarily merging of the technology. And in some companies you could probably say, well, we’re going to rip out your CRM and we’re going to put everybody in Salesforce or SAP or something like that. But when the software is the product, what are you going to do there?

And that’s where I think our offer really comes into play is because when you can start to look at the business capabilities, the product capabilities, start to understand at least the hypothetical domain design of the technology stacks, start to figure out what to extract, rationalize, combine, align the technology to the business, and then connect it up into the business problems they want to solve, then I think that’s where we start to be able to win. The idea is that somebody in that rollup at some point is going to be left holding the bag and is going to have to run that company and is going to have to grow that company and exploit its capabilities. And most of what we’re seeing in private equity rollups, at least the ones we worked with, is that that level of rationalization isn’t happening.

Philippe Bonneton 

Yeah, I think so. And I have sort of a yes and to it where you’re leaning towards the technology integration consolidation, figuring out the pieces. So on the rationalization, absolutely, I follow you. I think the yes end is as a private equity firm, you’ve acquired this asset and now the job is going to be to de-risk it, right? You have a business case to hit, you have a sort of valuation or an exit valuation that you’re thinking about how do you make it as predictable as possible? And so you can go with sort of financial leverage to figure out exactly how you’re going to get some gains early on. But I think what we’re seeing is that increasingly the de-risking needs to happen with how teams deliver software, how teams deliver product. And that’s where, in addition to the technology modernization that we can help companies with, portfolio companies with, there is the how the work is done and how is it done in a rapid manner, in a predictable manner, in a reliable manner.

And I think that’s becoming one of the key levers for PE firms is figuring out how am I going to get those teams that work under the CIO, those legacy software teams, IT teams, how am I going to make sure that I know they’re delivering very predictably that they’re focusing on value on what drives the business case. So there is some foundational operating model aspects to this that need to be worked on that go way past the financial arbitrage I was mentioning earlier. So I guess what I’m trying to say is there is a sort of technology modernization and consolidation play that’s critical to master. So you need to know how to do that, but you also need to know how to drive the right sort of governance, the right sort of flow of work with the teams that are executing within those portfolio companies.

And that’s a big shift, a big overhaul that if you’re focused on quick wins, kind of like, okay, we need to exit this or consolidate it in a year and we just need to focus on broad stroke consolidation and so on, you’re never going to tackle this aspect of it of how do you increase the throughput and the predictability of the teams that are delivering the software. Going back to my point, the teams that took that company to point A, how do you get them in a motion that goes towards that point B that’s going to lead to your exit?