Private equity fund managers are turning inwards to draw value from the decades of data held in their portfolios.
• New technology and data solutions are becoming essential links in the value creation chain for fund managers
• Traditional data collection is being supplemented with AI, algorithms and prediction models to provide financial estimates on target companies and existing assets
• Fund managers without access to years of investment data may be disadvantaged as others derive proprietary insights
Private equity fund managers are turning inwards to draw value from the decades of data held in their portfolios.
The trend is being driven by advances in technology and a boom in fintech service providers offering software solutions specifically catering to private markets.
The results have implications for the operational performance of portfolio companies as well as how new investments are identified by managers, and monitored by investors.
In a survey by Private Equity Wire, over 50 industry stakeholders were asked ‘What one area could GPs increase or improve their use of data, technology or AI?’ The most popular response was “value creation within portfolio investments”. The third most popular response (after the more obvious “back office and accounting”) was in “sourcing investments”.
The research forms part of the latest Insight Report by Private Equity Wire entitled ‘Why private equity is finally turning to technology’.
Leveraging recent developments in data science to add or find value from portfolios is the new secret sauce for GPs, say sources at or close to some of the oldest and largest funds, and the strategy is being increasingly used alongside in-person networking and old-school origination to find an edge.
“Data is creating competitive advantage,” says a US-based source working with one of the world’s largest private equity funds. “There’s more competitive pressure in terms of sourcing deals and driving value creation for investors, so you have to be able to identify those opportunities faster than others.”
More traditional data collection is being supplemented with AI, algorithms and prediction models to provide estimates for financial health and revenue growth at target and already owned firms. The trend also looks set to drive change within the organisational structure of many private equity firms as new data-orientated teams are built and hires are made.
“We’re seeing a lot more private equity firms invest in their own data science capabilities, internally, and or trying to partner with alternative data providers, to supplement their internal data science efforts,” says a technology consultant advising private equity firms on the subject. “I think most of the firms that we’ve seen, they’ll have a data team in place, or a lead data scientist and not much of a team beyond that.”
How private equity funds use this new capability is dependent on the software they are using or bringing in from third-party providers but also the amount of data they can leverage.
The volume and granularity of the data available on private assets today would have been unimaginable a few decades ago. The number of alternative-data providers is more than 20 times larger now than it was 30 years ago – with more than 400 currently active providers compared to just 20 in 1990, according to a report by the Alternative Investment Management Association in collaboration with SS&C.
As this universe of data expands exponentially, so too will the ability of private equity firms to leverage it for some competitive advantage.
Key Takeaway | GPs: With a long history of portfolio investments in a specific sector or specialism will increasingly leverage this data to set themselves even further apart from the pack.
