The critical need for scenario analysis

Alex Popp, Mercatus

As the ultimate black swan event hit the world in the form of the Covid-19 pandemic, private equity managers came to understand the necessity of including scenario analysis in their investment process.

“Fund managers and asset owners learned that it’s essential to be able to plan for the future. Nearly every conversation we have with private equity fund managers today includes a discussion about scenario analysis. This was not the case a year ago,” says Alex Popp (pictured), Vice President of Sales and Account Management at Mercatus.

This appetite is driven primarily by the stakeholders in the funds, such as limited partners (LPs). These institutional investors are are increasingly demanding transparency around their investments and what will happen to them in any given scenario in the future.

As part of their due diligence process, allocators often question asset managers about their data, reporting, insights, and ability to respond to ad-hoc requests. These requests have also become more frequent and pressing in the past year.

Popp comments: “As asset managers cope with an increasingly competitive environment and fee compression, they must look for new ways to differentiate themselves. One of these avenues involves investing in a data management technology which can provide an edge with investors.” The appropriate solution can help managers avoid a lengthy, painstakingly manual process in order to deliver forward looking scenario analysis.

The global pandemic not only made the need for scenario analysis clear, it also accelerated more efficient ways of performing such assessments. Popp elaborates: “In looking across a private equity fund, a manager may need to understand how an increase in oil prices will impact certain assets and how lower interest rates would impact the entire portfolio. With each asset’s valuation models housed in different places with different KPIs, it can be extremely resource intensive to accurately run scenarios to answer what can be very simple requests from investors.”

In Popp’s view, data management technology can help PE firms differentiate themselves. This is particularly relevant in an environment where investor appetite for private assets has been on the rise and competition for capital continues to be fierce. Popp observes: “We’re increasingly seeing that firms which don’t embrace the digitisation of their data management will almost certainly fall behind their peers. 

“Scenario analysis is just one part of the value a data management platform provides for PE firms. With a data management platform connecting all sources of data, be it from bespoke valuation models, Excel spreadsheets, PDFs, or disparate software solutions, PE managers are able to see a single source of truth for their investment data. This then enables them to easily create dashboards and insights, including the outcomes of forward-looking scenarios.”

These insights can provide firms with a competitive edge and showcase their expertise in ways which can bolster their offer to investors. 

Alex Popp, Vice President of Sales & Account Management, Mercatus
Alex Popp is the global head of sales and account management at Mercatus. In this role, he is responsible for all new and existing business. Prior to joining Mercatus, Alex was a Partner in the POPP risk GROUP, a management consulting firm that worked with the world’s global and regional financial institutions, where Alex was responsible for sales, delivery, recruiting and career development. Alex has a BA from Amherst College.

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