PE firms should get savvier with data

Private equity firms that successfully exploit data can benefit from increased efficiency and a competitive advantage over their rivals, according to some sources.

Some private equity firms are using data to help make the business and the fundraising process more efficient, according to a number of sector sources.

This trend is being driven in some parts by requests from LPs, but in most cases it is GPs that are starting to recognize the potential of big data, say the sources.

“Forward-looking firms are the ones that realize that there is a lot of data in their operations; they just need to do a better job of capturing it,” Kevin Kelly, chief executive and co-founder of private equity software solutions provider Altvia told pfm.

In particular, managers are using data during the fundraising process to keep track of the indicators that make an LP a good prospect, to flag existing investors and investors that turned down a previous fund for reasons that the manager can then address.

“Fund managers are starting to realize that they do not only need to be in front of LPs more frequently with more information at hand but they also need to be more targeted to make sure that their efforts are targeted at LPs that are their ideal prospects,” added Kelly.

And this trend is only going to become more widespread, said Jim Strang, managing director at alternative investment management firm Hamilton Lane. “The use of data in regards to fundraising is becoming more and more prevalent,” said Strang. “This trend is set to continue and in the future there is going to be better data and people are going to use it to drive decision making.”

For LPs, who are increasingly finding resource management a challenge, said Strang, data can be used to help drive decisions around private equity allocation and to help understand the market itself, including through peer analysis and cash-flow forecasting. In addition, LPs can use data at the individual investment level to determine benchmarks around fund performance, he added.

Hamilton Lane is not the only firm using data to support business decisions. Since its inception, asset management firm Adveq has used data and analytics to drive the firm’s decision making, Nils Rode, managing director and co-chief investment officer at Adveq told pfm.

The firm is utilizing data on a day to day basis in some departments. In particular, during the investment management process and in areas such as risk management.

“There are many stages in investment management process where you need to get knowledge and insights from huge amounts of data,” said Rode. “In the past much of this was done by investment managers, and to a large degree continues to be done by them, but of course if you have such new tools then you are able to do much more than was possible previously.”

Adveq works with financial institutions such as pension funds, insurance companies, family offices and asset managers located in Europe, North America and the Asia-Pacific region to target private equity opportunities globally. As such, the firm is required to sift through thousands of potential investment opportunities for its clients.

“There are millions of data points that can be collected from the universe of investment opportunities. There are thousands of fund managers, hundreds of thousands of companies that are either existing or potential investments, there is also information changing on a monthly or quarterly basis. You can only go so far to get through this sea of data manually, regardless of how many investment managers a firm has,” said Rode.

But managers should not be too worried about their continued relevance in this new data-driven world, Strang said. “Data and analytics are excellent at telling you exactly what factually happened but only helpful to a limited degree about what is going to happen. That’s where judgement and industry and market expertise comes into play.”