Proskauer partners Daniel Ganitsky and Jeff Neuburger address five factors for private equity firms to consider when evaluating the critical business decision of implementing blockchain-based technology solutions for their portfolio companies:

Daniel Ganitsky: Technology is causing private equity firms to deal with a whole new set of questions for their portfolio companies. The use of blockchain technology is one of those questions. Given operational factors and the fact that private equity firms often provide additional access to capital, it may make sense for private equity firms to consider using blockchain technology in their portfolio companies.

Jeff Neuburger: There are a number of factors that a private equity firm should consider in evaluating blockchain for their portfolio companies.

Factor 1: Do your portfolio companies need to upgrade their technology?

A threshold factor for a private equity firm to consider is whether its portfolio companies need to upgrade their technology. Today, most companies work on a client server architecture. If the system is old, if it’s creaky, if it’s inefficient, if the vendor is not committing to supporting it over the long term, it may be time to make a change. Does that software accommodate the growth that the portfolio company hopes to accomplish over the next few years? If there’s a decision that the incumbent technology platform needs to be upgraded or changed, it’s certainly a time to consider blockchain.

Factor 2: Do your portfolio companies have many commercial relationships with third parties?

Another factor to consider is whether your portfolio companies have many direct and indirect commercial relationships with third parties. An example of that is a portfolio company that relies on third parties for logistics, shipping, supply chain, and other business activities that support the portfolio company’s primary business. In cases like that, there often is a lack of visibility for the portfolio company into how its suppliers and third parties are performing. Blockchain provides that visibility, and also provides an element of technological based trust, where there are no contracts between the portfolio company and the third parties.

Factor 3: Are your portfolio companies engaged in businesses that require transactions to be processed very quickly?

Another factor to consider is whether your portfolio companies are engaged in businesses that require transactions to be processed very quickly. The reason this is important is because blockchain-based transactions are not processed as quickly as traditional client server-based transactions. For example, if your portfolio company is a retailer, the point of sale system needs to process transactions very quickly, and blockchain is probably not the right solution for that system. However, the warehouse management system, the inventory management system, the accounting system, all of those back office systems don’t need to be processing transactions at the speed of a point of sale system, and therefore, blockchain may be a viable answer for those types of functions.

Factor 4: How much of your portfolio company’s data is confidential?

Another factor to consider is how much of a portfolio company’s data is confidential. The public blockchain is an open book. This may be a concern for some businesses. To solve this, businesses can use private permissioned blockchains, where certain nodes are credentialed to have read or write access. These credentials can be configured to allow confidentiality, even among permissioned users. However, the optimal use of blockchain involves some data that is generally accessible. Thus, a business that allows some level of accessibility while keeping other information confidential is well-suited to blockchain.

Factor 5: How much money can you actually save by implementing blockchain?

The final, and perhaps most important factor, is how much money can you actually save by implementing a blockchain-based system? Traditional client server systems require a fair amount of investment to support the infrastructure around them. Blockchain eliminates the need to support an infrastructure around a client server implementation. However, blockchain is not without cost itself. There’s going to be a cost in transitioning existing systems to a blockchain system. There’s going to be a cost in training people on how to use a blockchain system. So, for a private equity firm and its portfolio companies, there has to be an analysis done as to whether the cost of switching to blockchain outweighs the cost of staying under its current system over the long term.