In the last few years, businesses have seen a significant shift towards digitalization, transforming industries and opening new opportunities for growth and innovation. Private equity (PE) investors, who traditionally focused on stable industries, are now playing a major role in speeding up this digital shift. “Private Equity and Digital Transformation” by D^3’s Digital Value Lab investigator Brian K. Baik, Assistant Professor at Harvard Business School, Wilbur X. Chen Assistant Professor of Accounting at Hong Kong University of Science and Technology and Digital Value Lab affiliate, and Suraj Srinivasan, Philip J. Stomberg Professor of Business Administration at Harvard Business School and Chair of the Digital Value Lab, dives into how private equity is driving tech adoption in their portfolio companies—and why this matters for businesses looking to stay competitive in today’s fast-paced world.
Key Insight: PE Investments Power Digital Transformation
“Private equity (PE) investors could be a driving force to accelerate digital transformation.” [1]
According to Baik, Chen, and Srinivasan, private equity firms are starting to close the digital gap between public and private companies. While public companies ramped up IT spending significantly between 2016 and 2021—reaching over $8 million a year by 2021—private companies lagged behind by about 20%. However, the study suggests that PE investments are starting to change that, especially for companies with less digital know-how. PE-backed firms, on average, saw a 13.9% boost in IT spending and an uptick in digital hiring, with this trend spanning sectors like manufacturing and retail, which historically have seen lower digital investments. The study points out that PE firms with in-house tech expertise or prior IT investment experience excel at driving digital change in their portfolio companies, suggesting the enormous value that experienced, tech-focused PE investors can bring to help companies leverage cutting-edge technologies for competitive advantage.
Key Insight: Digital Transformation Delivers Real Results
“Portfolio firms with a greater increase in digital investments post PE entry achieve faster sales and employee growth.” [2]
The research shows that investing in digital pays off. Companies that increased their digital spending after getting PE funding saw up to a 9.4% bump in future sales growth. They also saw 11.2% stronger employee growth, proving that digital transformation isn’t just about tech—it’s about real business growth. The study notes that even non-IT companies saw improvements from investing in digital, showing that tech adoption is key to success no matter the industry.
Key Insight: More Digital Investment, Better Returns
“Increasing the proportion of digital investments and digital hiring by one standard deviation is associated with 2.0% (2.1%) higher fund multiples.” [3]
Baik, Chen, and Srinivasan found that PE firms that prioritize digital investment in their portfolio companies get better financial results. Increased digital hiring and IT spending led to higher fund multiples, showing that tech-driven growth strategies are paying off. PE firms that push for digital transformation in their portfolio companies aren’t just helping those businesses—they’re seeing better returns on their own investments too.
Key Insight: Keeping Up with Tech Breakthroughs
“PE investors are more likely to target firms with ‘AI suitability’ after an event which triggered a substantial development in the field of AI.” [4]
The research also highlights how PE firms respond to major tech breakthroughs, such as the introduction of AlexNet, a big leap forward in AI. After this advancement, PE investors started targeting industries that could benefit from AI, with AI-suitable industries seeing a 37.9% spike in PE deals (it was a 52% spike when the research team accounted for control variables). By staying ahead of emerging tech like AI, PE investors are positioning their portfolios for future growth, making sure their investments are ready for the next big thing.
Why This Matters
For business leaders, understanding how private equity is driving digital transformation is key to making smart strategic decisions. PE firms aren’t just funding sources; they’re becoming crucial partners in driving tech innovation and operational efficiency across industries. If you’re in an industry that’s lagging in digital adoption, PE investment could be the push you need to speed up your digital journey.
PE-backed companies with strong digital capabilities are set to outpace their competitors in both growth and innovation, boosting their value and market share. As digital transformation continues to shape the future, partnering with PE investors who know tech could be the key to long-term success.
References
[1] Brian Baik, Wilbur X. Chen, and Suraj Srinivasan, “Private Equity and Digital Transformation”, Harvard Business School Accounting & Management Unit Working Paper No. 24-070 (July 1, 2024): 1-53, 1.
[2] Baik, Chen, and Srinivasan, “Private Equity and Digital Transformation,” 6.
[3] Baik, Chen, and Srinivasan, “Private Equity and Digital Transformation,” 7.
[4] Baik, Chen, and Srinivasan, “Private Equity and Digital Transformation,” 19.
Meet the Authors
Brian K. Biak is an assistant professor in the Accounting and Management Unit at Harvard Business School and a faculty affiliate in D^3’s Digital Value Lab. He teaches the Financial Reporting and Control course in the MBA required curriculum. Professor Baik studies how information, financial reporting, and corporate taxes matter for PE/VC investors or startup firms. Some of his works have focused on the role of financial statement disclosure for PE/VC investments, and whether and how private equity fund managers inflate their interim fund valuations (net asset values) during fundraising periods.
Wilbur X. Chen is an Assistant Professor in Accounting at the Hong Kong University of Science and Technology and a faculty affiliate in D^3’s Digital Value Lab. He graduated from Harvard University with a Ph.D. in Business Administration, from the Chinese University of Hong Kong with a M.Phil. in Accountancy, and from McGill University with a B.Sc. in Physics. His research interests are in capital markets, corporate governance, equity valuations and the economics of digitization.
Suraj Srinivasan is the Philip J. Stomberg Professor of Business Administration, Unit Head, Accounting and Management and faculty director of D^3’s Digital Value Lab. He holds a PhD in Business Administration from Harvard Business School. Professor Srinivasan’s expertise spans three research domains – data science and artificial intelligence, corporate governance and boards of directors, and financial reporting and risk management.