In this op-ed, Dmitry Schuetzle, Managing Partner at VIY Management (VIYM), shares his vision of the current digital revolution and its implications in the field of private equity. “The potential for digitalization is increasingly one of the most important investment criteria that we look at when assessing potential investments,” he writes, providing examples from his firm’s portfolio companies in Russia.
A revolution is under way
“We are at the beginning of a revolution that is fundamentally changing the way we live, work and relate to one another,” said Prof. Klaus Schwab, founder of the World Economic Forum. Indeed, this revolution is already under way, not least in my industry – private equity.
Today technology underpins virtually every aspect of day-to-day life. From taxis to smart homes and cars – there is almost nothing left that has not already been changed in some way by technology. We are entering into a new era – an era when we see network connections not only between mobile devices but also between people, processes and data. And these connections are fundamentally changing the way in which man interacts with technology.
Private equity has long been a supporter and financier of digitization. Most of today’s technology giants (the likes of Google, Amazon, Facebook, Yandex) reached their first breakthroughs thanks to private equity funding. But while private equity changed the landscape of technology companies, today technology is about to change the landscape of private equity firms.
Russia is no exception to global trends
This trend, which virtually pushes aside all others, is truly global, and its impact on the Russian economy promises to be as deep as that of the electrification program which reshaped the country in the first half of the 20th century.
In the 1920s and 1930s, the Soviet plan for the “electrification of the whole country” came as a crucial part of Russia’s modernization effort.
For people at an individual level, it represents a new leap forward in terms of day-to-day opportunities. For entrepreneurs, it’s all about optimizing business processes with innovative technological solutions – making them cheaper, higher quality and more in line with consumer needs.
As of today, the potential for digitalization is increasingly one of the most important investment criteria that we look at when assessing potential investments. It is clear that growth models that have usually attracted the eye of PE investors are drying up. The next phase of growth and profitable returns can only come from an increase in productivity, and one of the greatest driver of increased productivity will be digital innovation, if not outright disruption. We are already seeing this in our existing portfolio companies, which, at least until recently, would be traditionally viewed as offline businesses.
Digitized chocolates and clinics
Look at French Kiss, one of the leading producers and distributors in Russia’s premium chocolate and confectionery market, which used funds that it raised from VIYM in part to bring about digital innovation. It recently launched a new site based on the most modern internet architecture that allows its customers to buy products within seconds. It is in the process of launching a new mobile app that will in itself be an important further driver of sales. It is breaking new ground with its use of social media and contextual advertising. It will not be long until the technology behind this business is as important as the chocolate that it produces.
French Kiss, a portfolio company of VIYM, is one of the first Russian chocolate makers to have gone online. In 2016, its online sales already accounted for 7% of total retail sales.
Similarly, Family Doctor, a medical company running affordable high-quality clinics in Moscow and St. Petersburg, is in the process of implementing a digital overhaul that we believe will make it one of the most efficient healthcare businesses in Russia. Patients can now make appointments to see their favorite doctor in just a few clicks. Patients can see their full medical record and results through an app on their mobile phone. Family Doctor’s completely modern, computerized call-center looks nothing like the call centers of old, or even not so old. The company is using new technology and innovation to make quality medical services accessible to a growing number of Russians.
These are just two examples, but there are more, and soon there will be many more. Whatever the sector may be, our next investments will be in businesses that can benefit from digital upheaval – where the funds raised from us can help to unlock new value through digitalization. This is what will drive future value creation for PE players. Funds that don’t respond to this trend will soon find themselves unable to compete.
So, coming back to the words of Professor Schwab, the evidence of dramatic change is actually all around us, and it’s happening at exponential speed. Self-driving cars, Blockchain technology, online education and so on. Where the technological revolution will take us in the future, we can hardly even imagine. One thing is clear now though – the revolution is already here, and private equity is leading the charge.
- Dmitry Schuetzle has over 20 years of senior executive experience in financial services, industrial production, and retail. He leads VIYM’s investment offices in the UK, Luxembourg, and Russia. An authorized alternative investment fund manager, VIYM is regulated in Luxembourg and invests essentially in Russia and neighboring countries. The firm is dedicated solely to private equity services for international investors seeking investment consulting, deal origination and asset management.
