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Private Equity

Revenue multiples, rapid growth and Mergers & Acquisition in 2022.

Thomas Ballard · March 18, 2022 ·

Now that the Saharan dust has settled, we’re in for a heatwave here in England, at least for the next few months! A rare occurrence.

The other week, on the subject of heat, someone told me ‘the M&A market is so hot now’. If someone has to tell you something is hot, how hot is it?

We’re currently in a market where people are paying significant revenue multiples.

Typically, your portcos will be chasing these increased revenues aggressively; it’s considered sexier or perhaps more straightforward for firms to go after more revenue. With M&A, you can even buy yourself more revenue.

This might be OK for the growth investor, but surely, you can’t solve all your problems with revenue?

Rapid growth can often create structural technology challenges, compounded by M&A

These structural challenges can manifest themselves as bottlenecks in how applications function. Performance issues at scale. Slower or more complex product development cycles.

When you talk about revenue growth with your portco tech leaders. How do they react, what concerns do they have, what plans are they making?

Do they know the scaling limits of their systems today? Do they have well-defined non-functional requirements? Do they look at ways they can meet growth targets using technology?

Keep leading; it matters.


Thomas

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Ultimate performance. Ultimate efficiency. F1’s new budget cap

Thomas Ballard · March 11, 2022 ·

Today it’s my Birthday, which means it’s almost time for the Formula 1 session to start.

Formula 1 is a great model for ultimate performance. Every car, driver, and team element is fine-tuned to be the best of the best.

2022 is the first year that a total budget cap will be used, alongside many new car designs and regulations.

The idea is to use the budget cap to bring the mega and minor teams closer together in performance. The goal is to drive innovation and competition.

If you are an F1 team, you can no longer throw money at your problems. Efficiency is the only way to go while delivering the ultimate performance when needed. F1 teams have jumped on this challenge, and each looked to solve this problem entirely differently.

When you think of budget planning with your portco, tech leaders. How would your portco tech teams react when budget restrictions are placed on them?

Do they jump at the opportunity? Do they challenge the cost gap? Do they look at ways they make you portco more efficient using technology?

Keep leading; it matters.

Until next time

Thomas


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Try, test, fail, repeat—early morning as a technology value creator.

Thomas Ballard · March 4, 2022 ·

This morning was up and on my mountain bike at 5:50 am, before Sunrise, the best time of the day for exercise.

Yesterday I’d decided to replace an axel on my rear wheel; 5 minutes into my ride, I’d realised it had failed.

Last weekend, I decided to replace my disc brake pads, a routine change, it failed; I noticed it was a problem when a Nun quickly overtook me on her pushbike!

You’re probably thinking, what does this have to do with Technology Value Creation?

When it comes to fixing my bike, I can do what I like. I can try, fail, or even take it to the mechanic.

You might recognise the similarities between this and how Tech leaders execute technology transformation programmes. Technology leaders are often tinkerers by nature, ‘Tinkering may be a great way to solve a problem, sometimes by accident’ (Castel, 2020).

https://www.psychologytoday.com/gb/blog/metacognition-and-the-mind/202004/tinkering-can-lead-creative-insight-and-innovation

The tinkering try, test, fail, and repeat method might eventually work for me and my bike. But it’s not a sustainable approach to value creation for enterprise technology programmes.

That’s probably why 84% of tech transformation fails.

And why operating partners avoid working with their technology leaders, with <30% of all value creation being tech-led.

Technology has become an essential element of value creation for those who know how to leverage it

Some things to consider.

How easy or difficult is it for someone to disrupt your business using technology? How much would disruption impact you? How can you make it even more complicated?

Opportunities to leverage technology can be both offensive and defensive.

Value creation that involves technology needs to reduce the friction of change.

Doing this right alongside other value creation strategies could mean a step-changes to EV.

Keep leading. It matters.

Thomas


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What is the incentive for the companies being sold to become more than just good enough?

Thomas Ballard · February 25, 2022 ·

This week, I’ve struggled to find something insightful and pithy to write and share. This is probably a symptom of all the distractions that are going on in the world right now.

So, instead, I’ll share a short story about value creation.

This week I had an interesting conversation with a firm regarding their approach to M&A. Their M&A advisory firm was telling them this was the time to buy; the market is hot right now.

Do you wonder if someone has to tell you something is a hot property if it really is?

They were questioning this themselves; Valuations are still high, there is a great deal of completion to close new acquisition deals in 2022, what is the incentive for the companies being sold to become more than just good enough?

Did you and your firm spend most of 2020 and 2021 working on new buyout deals?

Are you finding that in 2022 value creation is that much more challenging than it used to be?

What value creation initiatives will be a priority for you in 2022?

  • How important is increasing EBITDA compared to revenue multiples?
  • Where does M&A sit on that plan, and how will you get good value for money?
  • What do you see as the most significant value creation differentiator this year?

Thomas

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Did you know that only 3% of all technology workloads are in the cloud?

Thomas Ballard · February 18, 2022 ·

That sounds like a tiny number, considering how every company, vendor and tech journalist talks about the cloud. Would you expect it to be higher?

I’ve quizzed a few people on this over the years; most guess it is between 25-30%. If you break down the 3%, AWS has the clear lead:

47% AWS, 15% Microsoft, 7% Alibaba, 4% Google, 2% IBM

This is a strong indicator there is considerable unrealised value for your Private Equity firm and for your portcos by getting more workloads into the cloud.

While on the other end of the value spectrum, corporate IT focus’ solely on the overall cost of technology platforms or systems, they typically see the cloud as an extension of this world.

Corporate IT’s focus is leaving unrealised value on the table.

The key to leveraging the cloud for Private Equity in 2022 is understanding the cost per user.

Cost per user is a financial representation of the cost to service each customer.

The sum of logical maps of your system details the relationship between business > service > application > infrastructure metrics.

But, translating business demand to technology demand isn’t common practice and the cloud won’t magically make your application or service more efficient.

If you don’t measure the relationship between what a user does and how much technology you use, you can’t predict it.

If you don’t predict it, how do you know what targets to set or what good looks like?

How do I know if my portfolio companies understand and leverage their cost per user?

The simplest way is to ask them.

  • Can they draw the logical map of their system for you?
  • Can they back that up with data?
  • Can their report how this changes over time?

If they can’t, then they have some homework to do.


Thomas

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