Private equity professionals are facing a more specialised and competitive market than ever. GPs are reviewing more deal opportunities, conducting more due diligence, and giving more fundraising pitches than ever before. Whether it’s identifying potential investments, or explaining their strategy to investors, PE professionals’ need for instantly actionable sources of deep intelligence and analysis is outstripping the ability of legacy data to keep up.
PARTNER FEATURE
By A Paris – Private equity professionals are facing a more specialised and competitive market than ever. GPs are reviewing more deal opportunities, conducting more due diligence, and giving more fundraising pitches than ever before. Whether it’s identifying potential investments, or explaining their strategy to investors, PE professionals’ need for instantly actionable sources of deep intelligence and analysis is outstripping the ability of legacy data to keep up.
“Strategy and investment selection in private equity is a complicated process, as is fundraising,” outlines David Lawrence, General Manager, DealEdge. “Therefore, information which can support these procedures can help fund managers make more incisive investment decisions.”
In an effort to support private equity managers’ growth and investment endeavours, DealEdge is introducing deal returns benchmarks to the private equity space. Historically, benchmarks have only been available at the fund level and deal information was only reported in aggregate. This new solution, offered by DealEdge, takes this reporting a step further, providing deal-level benchmarks on returns achieved in specific industry subsectors. The benchmarks can drive data-driven decision-making across the investment lifecycle, making deal screening more efficient, augmenting due diligence processes, and empowering fundraising.
DealEdge was created as a partnership between Bain & Company, the leading consulting partner to the private equity industry and its stakeholders, and CEPRES, the digital solutions provider for private markets. Its goal is to give private equity investors unprecedented insight into the performance of private equity investments and how PE businesses build value.
Lawrence describes how private equity managers are using the data provided by DealEdge at the investment committee level: “Here, this information is serving as an unbiased pressure test of a manager’s investment thesis. They can consider the revenue generated in their chosen sector and how this compares to their projections, thus checking whether their goals are achievable and whether the thesis makes sense or not.”
Further, against a background of growing digitalisation, the ability to access granular information is even more relevant.
“There is a significant trend which sees private equity managers using more data and digital solutions. What we do fits very well in this context. DealEdge is enabling private equity firms to get benchmark data early in the investment process and include it in their pipeline. This information can act as a quick screen whenever they’re considering investments, as a starting point when they’re considering their strategy, or as a comparison point for post-mortem reviews and fundraising conversations.”
In-depth data to enhance decisions
Traditionally, the private equity industry has been able to see individual deals, but without any of the financial details behind them. Alternatively, they could access aggregate fund performance.
“Investors could see how well a fund has done, but not have any information about the underlying deals. We have come up with a way of showing a more detailed level of data,” Lawrence explains.
Having access to granular, specific financial information on all deals, and being able to benchmark against those deals, is revolutionary in the private equity industry. This is simply because none of this information has ever been available before.
Such information can support fundraising efforts, which can help managers add an additional dimension to their pitch. This is even more important given the shift to virtual due diligence, which makes connecting with potential investors significantly more challenging.
Lawrence notes: “Providing a quantitative deal benchmark can help private equity firms’ proposition and build investors’ confidence in the managers they choose. By looking at this benchmark, LPs can see whether the managers they’re investing in have performed well across a wide spectrum of deals.”
Boost to fundraising
This would be the backwards-looking application of this benchmarking tool. Having and presenting this information can help support a manager’s investment case and fundraising efforts by showcasing how its individual deals performed across certain subsectors. It provides transparency into the fund performance and gives an element of performance attribution to help understand what is driving the fund performance.
Lawrence believes this tool should become an established part of the fundraising process and states: “Managers can show how each of their deals has performed and give that extra level of insight to investors.”
Traditional methods of inquiry used in the PE industry are one thing currently standing in the way of this penetration. Historically, managers relied on fund metrics and internal data to produce this type of analysis. However, this runs the risk of being subject to bias. “Sourcing deal data from a tool provides managers with an unbiased market benchmark, based on hard numbers. It’s comparable to the S&P500 or the FTSE in the world of public equities. The benchmarking ability DealEdge offers allows for apples-to-apples comparisons of the specific deals GPs are executing,” Lawrence points out.
The DealEdge benchmarking tool can also act as support for strategy-setting, in a forward-looking manner. Through this service, managers can strengthen their investment decisions by accessing granular data about deals completed in a particular subsector. This can help them uncover potential investment opportunities within those niche areas. Lawrence comments: “The DealEdge service allows managers to conduct due diligence on those investment opportunities and supports better data-driven decision-making processes.”
Subsectors covered by the tool are varied and very specific; for example, managers can draw up benchmarks for private equity returns in paper packaging or rating agencies. These may be niche sectors which either don’t trade very often, or on which there is little available information.
The benchmarking tool is a high-level overview which allows users to access a broad range of industries. Managers can, for instance, choose to pick those which have done particularly well over the last 10 years and identify which might be worth closer examination.
Client participation in growth
Ultimately, these benchmarks are bringing something new to the market and are heralding what could be a new era for transparency in PE deals and the returns they generate.
However, the most crucial test of any new tool is how it can be incorporated into existing workflows and processes. Fortunately, DealEdge’s approach means that clients have the opportunity to contribute to the way the product is built out in future, with functionality being included on the back of client demand.
“We will allow firms to upload their own data into the system. This means they will be able to see their data on all the graphs and analysis we offer. This will allow clients to very clearly see how well they have been doing and showcase this to their potential investors,” Lawrence concludes.
