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.

https://youtu.be/2anba389uac

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 process 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.

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Photo of Daniel I. Ganitsky Daniel I. Ganitsky

Daniel Ganitsky is co-head of our global Private Equity and M&A Group and a member of the Latin America Practice Group. Over the course of his career, Daniel has had significant roles in numerous public company transactions, acquisitions of private companies or businesses…

Daniel Ganitsky is co-head of our global Private Equity and M&A Group and a member of the Latin America Practice Group. Over the course of his career, Daniel has had significant roles in numerous public company transactions, acquisitions of private companies or businesses, restructurings, proxy contests and financial advisor representations. Since joining Proskauer less than a decade ago, he has worked on over 125 publicly announced transactions with an aggregate value of more than $175 billion.

In 2014, Law360 selected Daniel as one of ten “Rising Stars” in mergers & acquisitions and two years earlier, M&A Advisor selected Daniel as one of the top 40 M&A professionals under the age of 40. He also has been recognized by Chambers USAChambers GlobalChambers Latin AmericaThe Legal 500 United StatesThe Legal 500 Latin America and Super Lawyers. Daniel has also been recognized as a notable M&A lawyer by IFLR 1000.

Chambers notes that he is “very business-oriented”, “added value to the transaction” and is “much admired by clients for his dedication, M&A expertise and ability to drive negotiations through to completion.” Chambers also states that he is an “exceptional performer,” “easy to deal with,” has the “capacity to outsmart the counterparty with his ability to negotiate” and “has received great acclaim as one of the most promising younger partners in the market.” The Legal 500 points out that Daniel is a “trusted advisor” who is “sharp – a fast thinker and very responsive and technical” and is noted for his “solving of problems,” “expertise and common sense” and “complete knowledge and understanding of the complexities of conducting an M&A project.” The Legal 500 also says that Daniel is “a recognized specialist in Latin America M&A – a hands on partner” who is “a pleasure to work with.”

Since joining Proskauer in the summer of 2010, Daniel has been particularly active in the Firm’s representation of clients in public company transactions, cross border matters and private equity investments. Daniel was also part of the team that represented the Pac-12 Conference in the creation of Pac-12 Networks, an innovative arrangement providing unprecedented exposure for the conference’s athletic and academic programs.

In addition to his transactional work, Daniel routinely advises corporations, stockholders, directors and officers in connection with SEC reporting obligations and periodic reports (including proxy statements, registration statements, Form 8-Ks, and Schedule 13Ds), formation of entities, board governance, stockholders affairs, SEC no-action letters, “poison pen” letters, shareholder rights plans and other corporate law and securities matters.

Born in Colombia, Daniel is fluent in Spanish and has worked on transactions throughout Latin America with many of the leading law firms and investment banks in the region.

Photo of Jeffrey Neuburger Jeffrey Neuburger

Jeffrey Neuburger is a partner, co-head of the Technology, Media & Telecommunications Group, a member of the Privacy & Cybersecurity Group and editor of the firm’s New Media and Technology Law blog.

Jeff’s practice focuses on technology, media and advertising-related business transactions…

Jeffrey Neuburger is a partner, co-head of the Technology, Media & Telecommunications Group, a member of the Privacy & Cybersecurity Group and editor of the firm’s New Media and Technology Law blog.

Jeff’s practice focuses on technology, media and advertising-related business transactions and counseling, including the utilization of emerging technology and distribution methods in business. For example, Jeff represents clients in online strategies associated with advertising, products, services and content commercialized on the Internet through broadband channels, mobile platforms, broadcast and cable television distribution and print publishing. He also represents many organizations in large infrastructure-related projects, such as outsourcing, technology acquisitions, cloud computing initiatives and related services agreements.

Serving as a collaborative business partner through our clients’ biggest challenges, Jeff is part of the Firm’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team helping to shape the guidance and next steps for clients impacted by the pandemic.