2nd Watch: Data and analytics drive private equity roll-up

Private equity firms have a major challenge when executing roll-up strategies in their investment sectors. Rolling up multiple acquisitions creates an information and reporting nightmare. How do PE firms and their operating C-suite teams quickly get basic financial reporting from each acquisition, and how can they get consolidated financial information across the newly built enterprise? Additionally, once basic financial reporting is in place, how do they accelerate the financial and operating transformation for finding cash flow enhancements and EBITDA improvement opportunities?

As deals in the acquisition roll-up pipeline begin to close, there is typically a proliferation of information management systems from each of the newly acquired companies. As the number of information systems mounts, it becomes increasingly difficult to produce good financial reports. Typically, this results in a manual financial consolidation process that requires each acquisition to submit their statements to the PE. The PE is then left with this very difficult and time-consuming process at a time that is extremely critical to the deal.

With this newly acquired ‘Tower of Financial Babel’, PE firms and their operators are looking to accelerate profit improvement and value creation. However, they are usually trying to make management and value transformation decisions while sorting through a legion of information management systems with different charts of accounts, conflicting formats, and diverse accounting policies. To deal with this mounting incremental complexity, the deal accounting team must try to reconcile the statements, which frequently requires multiple conversations with each of the acquired company’s executive teams. In turn, this process takes away valuable time needed by each of the executive leadership teams to manage their company and create value.

The reality is, the financial consolidation process for the typical PE roll-up is highly complex, manual, and very slow. As more roll-up deals are completed and added to the enterprise, the problem only gets worse and more fragmented. Given this difficult process, consolidated statements are often delayed and can even become suspect as the potential for reporting errors increases with process complexity.

How does a typical PE firm identify the EBITDA improvement opportunities?

Those are just the basics. From there, incremental value creation and financial transformation become more difficult. How can the PE firms quickly begin the financial and operating transformation that needs to take place? Specifically, how does the typical PE firm identify the EBITDA improvement opportunities, as well as the cash flow harvesting that needs to take place across the new and expanding acquired enterprise?

The first thought might be to merge all the new acquisitions onto one of the incumbent systems. However, these types of large-scale ERP migration projects are very risky and prone to failure, often running late and way over budget. They are incredibly disruptive to location operating management, who are also integrating into the new ownership structure, as well as trying to improve operations and financial results. Migrating each new acquisition from the deal pipeline onto a new ERP, EMR, or any other centralised management platform is difficult, complex, expensive, and disruptive at a time when the new acquisition is vulnerable. PE firms want their operating teams focused on execution, operations, and financial performance – especially when the roll-up strategy is in the initial stages.

Worst of all – the PE and the executive teams risk integrating onto an existing enterprise information management system that may be sub-optimal for the new larger, consolidated company. The process will most likely create short, medium, and long-term management issues, which will be recognised in the future deal exit.

Instead of migrating onto an incumbent system – why not take a long-term approach by developing a true data-driven strategy? Take time to develop a holistic view of the new enterprise, and be deliberate when devising and implementing a new enterprise management system. An enterprise view allows the roll-up to find and implement the market-leading systems necessary to create the ultimate strategic competitive advantage for the future state company. Thankfully, this data strategy can be developed quickly – often in a matter of a few weeks.

Pull sources of data – ERP, CRM, IoT – into a consolidated data warehouse

The best way to accomplish these goals with minimal operating company disruption, and on a relatively short timeline, is to merge the portfolio companies on a data basis. Pull each of the portfolio company’s sources of data (ERP, CRM, EMR, auxiliary systems, social media, IoT, third party, etc.) into a consolidated data warehouse. Then integrate the companies on a virtual basis, designing and implementing a powerful data model to enable consolidation.

Once the data warehouse and the consolidated data model is in place, standardised, single-source-of-truth, finance and operating statement dashboards will be in place. These dashboards generate near real-time insights for PE management, their lenders, the executive management team, local operating managers, and employees. Dashboard reports enable self-service analytics, which allows for a much deeper understanding of portfolio company performance, and efficient operational reviews and conversations.

With the dashboards in place, the complete team can focus on value identification and creation with standardised KPIs (e.g., EBITDA, operating metrics, cash flow, etc.). Dashboards can be designed and built to benchmark across the portfolio companies and up against best industry practices. Value trend lines can be measured, as well as identifiers of both best case and lagging performers. Specific areas of performance can be targeted (e.g., A/R, inventory, fixed asset utilisation, labour efficiency, etc.) and compared to find sources of cash flow improvement. With these tremendous analytics and insights, best practices can be identified, and action plans can be created to implement across the new enterprise. Conversely, remediation action plans can also be put in place for lagging performers with improvement monitoring and scorecards.

Building and implementing an enterprise data warehouse and business intelligence dashboards creates the asset of true incremental value. With enterprise data consolidated and modelled, new opportunities for predictive analytics, data science, and deep value discovery are possible. 

New marketing analytics strategies can be put in place. New products and services can be imagined and developed through data science ROI use cases. Optimisation opportunities will be found, analysed, and implemented. As operating teams become more data-savvy, more use cases will be discovered and implemented for continuous optimisation.

In summary, the quickest and most effective way to impact a PE financial and operating transformation for a roll-up is to integrate at the data level. Data integration, consisting of a data warehouse and targeted financial and operating dashboards, accelerates the value creation deal process. In turn, PEs are able to maximise the financial ROI of the deal, thereby generating the greatest return for the investment firm and fund investors.

About Jim Anfield of 2nd Watch

Jim Anfield is a Healthcare Practice Lead at 2nd Watch, a premier cloud and data & analytics technology consulting firm. His experience covers a broad spectrum of healthcare payers, providers, third-party administrators (TPAs), healthcare business service providers, and healthcare tech with various use cases that include payment, treatment, and operations. Jim focuses on helping his clients grow revenue, reduce cost, and deliver supreme customer experience by leveraging enterprise data and applying analytics.

About cloud, data and analytics experts 2nd Watch

2nd Watch walks alongside its clients to help them navigate and embrace change to provide better customer experiences through the blend of technology and innovation that is at its core.

Their cloud-native capabilities in strategic consulting, workload design, technology deployments and workload management enable their clients to have the agility of a growth company and the security of a leader. 

2nd Watch’s team of experts works with global brands in financial services, retail, fast-moving consumer goods, media, manufacturing IT, healthcare and education.

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