When it comes to cloud computing, there are many reasons why private equity firms are holding back on the transition.
Historically, private equity valuation economics has favored capital expenditure (CapEx) versus operating expense (OpEx) as a primary investment source for IT infrastructure. This was so funds could better manage depreciation cycles and benefit from favorable treatment in enterprise value calculations.
As cloud computing continues to scale in the marketplace, cloud economics offers a compelling value proposition relative to the opportunity cost of large CapEx investments in assets that are not central to value creation.
So, when might a private equity firm consider a move to the cloud?
Your growth thesis depends on innovation through capital investment.
If your portfolio consists of cutting-edge, high-tech companies that require capital investment in the core product or service offering, cloud computing offers an opportunity to focus CapEx on core value-creation activities. It enables continuous technology enhancements while eliminating the distraction associated with managing an internal infrastructure.
Additionally, cloud infrastructure provides a significantly lower-cost entry point to best-of-breed technology for smaller organizations, while offering scalability to grow with the business.
Cloud computing enables a firm to rapidly accommodate various demand changes, including the cyclical or seasonal needs of investments, without resource constraints.
Your cash flow reigns supreme.
If cash flow is king or your portfolio requires significant working capital, cloud offers a simple way to consume IT on an as-needed basis with a monthly expense that aligns with your portfolio’s revenue and investment cycles.
Transitioning to cloud provides a stable and compliant infrastructure, mitigating any need for sudden capital investments resulting from platform growth—allowing real-time scalability of resources.
Increase the efficiency of deployed capital by using cloud to align IT expenses with the timing of revenue and receivables to keep your cash flow strong.
Plus, cloud users can avoid time-consuming and cash flow eroding activities, such as:
- Retaining top IT talent in a highly-competitive market
- Conducting annual IT capital budgeting and opportunity cost analyses
- Complying with downstream (customer-driven) compliance requirements regarding business continuity and information security
Information Technology is NOT your core business.
If information technology isn’t central to your portfolio company’s value proposition, cloud allows your operating partners to focus their time and energy on realizing the value of the investment.
While cloud doesn’t eliminate all responsibility for managing an IT environment, it provides a standard platform with flexibility to align solutions by LoB to scale up or down with your business. Plus, various levels of information security methodologies are available, including options for healthcare, legal, and other highly-regulated industries.
A reputable Managed Service Provider will have the technology expertise and industry context to:
- Design and support an appropriate cloud-based infrastructure for your portfolio companies
- Provide strategic oversight of your technology roadmap
- Ensure efficient delivery of your technology, regardless of platform
- Mitigate risk by monitoring infrastructure and managing patching cycles
- Deploy resources on-site and provide service to investments, as needed
Cloud may appear to inject additional operational expenditure (OpEx). However, with the appropriate consideration of the opportunity cost of deployed capital, resources, and leadership team focus, the economics may allow for a lower total cost of ownership over your planned investment horizon.