Private equity firms are writing a new chapter in their playbook to favor business models incorporating data utilization and technology.
The pandemic and COVID-19-induced recession have accelerated trends already in motion. In the new normal, every company — no matter the sector — will collect and use data to its advantage. All companies will replace existing business models with technology-enabled models that own few assets, making these companies higher priced and more nimble, industry executives said.
The digital transformation is a huge benefit in the COVID-19 world in which private equity and venture capital firms are trying to sell or take public as many portfolio companies as possible before the potential double whammy of a second wave of the virus and increased market volatility around the U.S. presidential election.
"There will not be a reversion to a pre-pandemic economy," said Jason Thomas, Washington-based managing director and head of global research at The Carlyle Group LP.
As the pace of digitization accelerates, investors should think more in terms of business model variations than differences between industries, Mr. Thomas said.
In a few years, technology may not be viewed as its own sector but instead as a differentiator between businesses that thrive or falter in a post-pandemic reality, irrespective of the industry, he said.
Companies able to shift to a technology-enabled model with fewer assets will be in better financial condition than comparable companies at the start of the pandemic that didn't make that shift, Mr. Thomas said.
Right now, the main focus is on sectors, he said. Companies not making big changes toward digitized, technology-enabled business models are losing market share, and their private equity owners will have tough exits in their futures, Mr. Thomas said.
Asset-light companies such as manufacturers that own neither their plants nor the trucks that take goods to market started after the Great Recession, he said.
"In the global financial crisis, the businesses with the biggest financing needs were the ones that needed to finance their physical assets and inventory," Mr. Thomas said. "Whereas, their biggest assets were their brand, people and data. So, they started to sell off their physical assets."
Advances in technology are making it easier for companies to shed their assets, making them more resilient, he said. Carlyle had $84 billion in private equity and $221 billion in total assets as of June 30.
And these aren't the only changes companies are making.