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Digital is reshuffling Private Equity’s value-creation cards

Kea-Euclyd has been advising companies in the digital transformation of their businesses for 17 years. For Didier Long, Kea-Euclyd’s founder, digital is an essential source of value creation that will force private equity firms to rethink their support strategy. Here’s what he had to say.

Didier Long Kea Euclyd

How does digital transformation create value for companies?

Didier Long: Digital is destroying everything in its path, reconstructing the market with abandon and creating and an unprecedented value-creation opportunity. The markets most affected are the laggards, and France is one of them.

While many mid-sized companies are way ahead, such as Manutan and Maisons du Monde, CAC 40 companies are just now waking up. Under pressure from the GAFA and radical changes in consumer behaviour, digitalisation has been roaring through every sector over the past 20 years, cleaning and rebuilding the market as it goes. As in every industrial revolution, digital technology is causing “creative destruction”, and mid-sized companies have just the right critical mass for rapid change. Tomorrow’s winners will be the most agile companies that adapt to the new digitalisation mindset.

Tell us about the digital awakening of some mid-sized French companies.

D.L.: Let’s look at the ones I’ve just mentioned, Maisons du Monde and Manutan. We helped Xavier Marie, the founder of Maisons du Monde. At the outset, in 2008, he had only one person dedicated to e-commerce! Jean-Louis Rambaud and Bruno Candelier of Apax Partners really drove the process and laid the groundwork for a new adventure. Kea-Euclyd worked upstream and downstream of the takeover, first with the investment fund, then with the management team. Xavier Marie, who is curious about everything, launched into the digital field with French pioneers such as Christophe Tricaud and Claire Gourlier of Euclyd, with whom we designed Fnac.com. As a result, Maisons du Monde’s business model was turned into an omni-channel, furniture/accessories fast retailer, with 20% of sales online, 30% on in-store sales staff’s tablets, and a single, centralised warehouse. E-commerce has been a way for the company to gain a foothold internationally, where it had no stores.

At Manutan, the business model changed from mail-order to digital in five years. Manutan’s clutch of warehouses has been replaced by sustainable logistics with a university, squash courts, and an IT system that has been completely transformed into an ecosystem of expert functions focused on customer service above all else. This was a conscious, socio-digital shift, driven by the executives and family shareholders. Here also, curiosity about technologies and the constant awareness of behavioural changes are what made it work. Time was also a determining factor.

What are the principal impediments companies face?

D.L.: Two big ones are rigidity and a lack of technology culture among executives. The “transformation” component is essential. In this context, private equity funds often have a determining influence. Through their vision, companies can look up from the daily grind, imagine things differently and set off on a new path. But you need to do more than bring in a digital Messiah to make a miracle happen! The whole structure must digitalise, from the business model to the business line processes and the IT systems. Product and service offerings must be adapted; sales and the supply chain must become omni-channel. But to be effective, the transformation must start at the top.

Towards the end of an assignment four years ago, a CEO found the road ahead daunting and told me, “We are long-distance runners, and you are asking us to run like Usain Bolt!” Three years on, his company is now an online leader in the textile industry. As another example, the clothing retailer Kiabi, for which the 1990s were a difficult period, now sells more than €100 million online. Inditex (Zara) sells €2.5 billion online, whereas the company got off to a late start in the autumn of 2010. This speaks volumes about the importance of execution and technological expertise. Inditex is another example of a company that used e-commerce to make inroads abroad, in Australia and New Zealand.

The idea that the GAFA will devour everything is illusory. The brands that transform themselves and digitalise will be the leaders of the “phygital” age, in completely reconfigured markets where consumers have new expectations. Digital is the way for mid-sized companies to internationalise.

How are investment funds positioning themselves with respect to the digital transformation of their portfolio companies? 

D.L.: Variably. We have been working with Apax Partners for 15 years on the subject, whereas other funds started to take notice only three or four years ago via the digital aspect of due diligence. It was then they started to wonder what would happen to their assets in a transformed and necessarily digital world and who would capture value. Funds must think about an asset in the context of a changing ecosystem, where a major B2B agri-food company can transform into a data & logistics powered marketplace. In this example as in many others, digital is the driver behind the change in the business model. In the lagging market that is France, some sleepy brands will be woken up by the kiss of a digital prince charming, some century-old companies will collapse or be completely reborn, and entirely new ecosystems created through buildups will emerge. Physical vendors are already converging with digital players and changing the course of history. We are seeing it with Amazon – Whole Foods Market; Monoprix – Ocado, etc.

Consultants are a third term in the shareholder-executive equation. But they are neutral. They can bring new ideas and independent expertise with respect to the fund, and can also build the socio–digital transformation which, in the end, is an “experimental human art”. It is on them that the creation or destruction of asset value depends.

Do you see private equity firms undergoing widescale digital change so as to position themselves as value creation partners for their companies?

D.L.: The ability to change a business model is becoming increasingly important in creating asset value. We are not private equity experts, but it seems to us that financial engineering overall will undergo profound change. Private equity firms are becoming entrepreneurs’ partners with financing structures we can’t even begin to imagine. The whole structure of shareholders, funds, mezzanine lenders and bankers is set to be disrupted in the digital era. Who would have thought any of this would happen 20 years ago?

Source : Apax Talks

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Apax Partners

Investment fund supporting middle-market companies in four focus sectors: TMT, Consumer, Healthcare and Services.

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