The Digital Transformation of Energy and Private Equity — Top 7 Trends for 2021
By Sebastian Gass, CTO, Quantum Energy Partners
The disruptive force of technology requires companies to continuously evolve and reinvent themselves in order to survive. At Quantum Energy Partners, we are seeing the business model transformation in two industries: Energy and Private Equity (PE).
Software, Cloud, and Artificial Intelligence are redefining how all enterprises compete. The world’s population growth, associated need for energy, and accelerating climate change are forcing a radical redesign of the Energy industry. As stewards of significant amounts of capital, the PE industry is uniquely positioned to influence and drive change towards a more digital and less carbon-intensive future.
2021 will be about building higher-margin, digitally enabled, and sustainable enterprises. Here is what we expect to happen:
Trend 1: ESG (Environment, Social, Governance) will go digital
While 2020 will be remembered for the COVID-19 pandemic, the ESG tsunami will be a close second. Last year, we saw (i) a record amount of carbon-neutral/net-zero announcements in and beyond the Energy industry (e.g., Oil and Gas Climate Initiative), (ii) financial institutions pledge to become ESG impact investors (e.g., UN-supported Principles of Responsible Investment) and (iii) the broader business world realize that ESG might just make good business sense given consumer behavior and business conditions. Naturally, this resulted in an immediate need for digital solutions to capture, track, and report ESG metrics.
In oil & gas, capturing carbon emissions, reporting in accordance with established protocols, and providing the assurance and auditability are nontrivial in nature. In addition, providing visibility into safety, diversity, and social metrics across a large organization is often more art than science. The accuracy and predictability of these measures are becoming ever more important, and an interesting set of digital tools is under development. One set is focused on using IoT devices to accurately report emissions data. Another set of tools is focused on tracking and tracing set goals. All will increase their accuracy by incorporating machine learning (ML) techniques. The use of the tools amongst PE eco-systems along with the accuracy of data will greatly increase and improve in 2021.
Trend 2: Data across the portfolio will drive a competitive advantage
Bloomberg reported in December 2020 that Blackstone may begin to monetize the large amount of data it receives from the companies it controls. Blackstone is very serious about this initiative: earlier in the year, it hired ex-SAP CEO Jennifer Morgan to lead the technology transformation across its Portfolio Companies (PCs). Clearly, a more digitized portfolio equates to a more competitive one. PCs, which are often smaller than their public peers, struggle to digitize given their relative lack of scale. Moreover, a somewhat short-term investment window (3–7 years) does not always lend itself to lengthy digital transformation projects. In addition, the IT skillset required to transform is often missing within PE-backed companies.
However, while applications come and go, the data that gets generated across the portfolio holds valuable insights and could allow Private Equity ecosystems to compete as networks vs. individual companies. Modern, cloud and open source based big data environments allow for cost-effective data ingestion, storage in data lakes, and management via unified data analytics platforms such as Databricks, Azure Synapse, and others. The modern and IT savvy PE firms, such as Blackstone, are starting to create these data environments across their portfolio. The captured data has the potential to radically improve investment decisions and business competitiveness.
Trend 3: Private Equity Companies will utilize the Cloud to digitize their Portfolio Companies
Today’s Portfolio Companies generally run on outsourced corporate function stacks (e.g., HR and Finance), deploy simple point solutions for their business functions, and often don’t have analytical AI layers. While it usually does not make financial sense to replace existing solutions, modern cloud environments offer savvy PE firms the opportunity to radically improve software deployment and digitization of their Portfolio Companies. Leading PE firms are architecting common data, integration, and application layers in the cloud, allowing their PCs to choose from an array of different digital solutions while easing integration with legacy environments. This kind of cloud IT footprint will allow new PCs to easily hop on to the cloud IT environment at acquisition and hop off at the time of sale. IT costs become variable based on usage, data gets captured and copied seamlessly and small companies have access to best in class digital solutions.
This trend will further be accelerated through the utilization of existing cloud marketplace solutions. In the Energy industry, Amazon Web Services recently announced an energy competency model of their Independent Software Vendor (ISV) marketplace. Microsoft is working on an Open Energy solution footprint and Google is growing their ISV marketplace. Cloud marketplaces will ease the integration of solutions and offer powerful machine learning. Private Equity companies can pick from a list of certified vendors to build their best-in-class suite of digital applications. The data, integration, and micro-services layer becomes a key differentiator for the Private Equity network.
In addition, CI/CD (Continuous Integration, Continuous Development) pipelines, architecture patterns, and micro-services will create an open integration layer allowing digital solutions to be plug and play like in an application store. This well-architected open layer will provide the PE firm with a sustainable, cost-efficient, all-encompassing IT solution to run its entire PC Industry cloud network.
Trend 4: Private Equity will invest in their internal IT initiatives like never before
Private Equity and service providers have long disregarded internal IT. Consequently, most PE software is outdated, prone to cyber vulnerabilities, and hard to digitize. Only a few service firms have detailed knowledge of a PE firm’s business processes while having the expertise around digital transformation. For a while now, the bigger firms have built their own internal stacks to manage their businesses. Cloud providers now offer more options to augment older technology with integrated business analytics solutions. This will drive PE firms to combine investor, financial, accounting, Portfolio Company performance data, and market data into a real-time, 360-degree view of the firm.
Trend 5: Private Equity companies will compete with bigger companies through combined scale and data capabilities
Digitizing Portfolio Companies will increase transparency and finally allow PE firms to drive decision making across an entire portfolio rather than at the individual PC level. While preserving the entrepreneurial spirit of the member companies, holistic approaches to sales, procurement, and common corporate systems will enable the concept of what we call strategic shared digital services. For example, at Quantum, we believe we will be able to drive meaningful procurement savings and commodity price realizations by using advanced purchasing, marketing, and hedging strategies. Using common corporate system standards for HR, Finance and HSE (Health, Safety, Environment) will further reduce IT costs while providing uniformity advantages. The shared digital platform powering the strategic services will create a common data platform continuously providing real-time updates across the portfolio.
Trend 6: AI enters the Private Equity firm
While Private Equity has been a successful AI investor, the use of AI in the core PE business has been lacking compared to other industries. The introduction of modern, cloud-based AI stacks will soon change this. Analyzing portfolio performance via machine learning and improving capital allocations while optimizing exit strategies is a new frontier for PE firms to break into. While many PE firms are quite good at using their “gut” instinct and tapping their institutional knowledge, machine learning offers quicker, more real-time decision making on underlying patterns harder to detect in larger and more complex firms.
Trend 7: Digitizing the energy transition towards less carbon
Private Equity networks can move much faster than public enterprises. PE leaders have been pushing for a lower carbon footprint while ensuring reliable, affordable energy for the world that generates a radically lower carbon footprint. Private Equity investment mixes are already moving towards cleaner and greener energy alternatives, including natural gas as a bridging fuel, and wind, solar, and battery storage to replace carbon-intensive coal-fired generation. In the Energy industry, digital solutions will empower hydrocarbon extraction to generate less greenhouse gas through avoidance of flaring, improved leak detection, and carbon optimization throughout the operations. In addition, digital solutions such as solar potential calculations, wind prediction, power grid optimization, and maintenance optimization will become standard across PE networks. PE firms have the potential to take on the social responsibility of the climate crisis while generating top returns.
2021 will be an exciting year for Private Equity to accelerate its digital transformation to improve the double bottom line: superior returns for investors and improved ESG outcomes for society.