Private fund manager 2.0

I'm willing to bet that in looking through the investment opportunities you've seen over the last 18 months, you probably remember where most of the best ones came from. You work closely with your deal sources and, accordingly, it’s not hard to remember who you have to thank for showing you the good ones.

But if you’re seeing more than several hundred opportunities every year, I’d also be willing to bet that properly-captured data would show you interesting insights into the sources you rely upon to create value for your investors.

Jeff Williams

The ability to track where your investments are sourced is one of the obvious benefits technology provides to many of today’s investment managers. I’d even argue that it has become the norm. Many of our clients are now tracking fifteen years or more of their data and always know who the hottest sources are over the last twelve months, six months, and three months.

The next step in the evolution of the technology-equipped investment manager, however, lies in putting data on top of this to tell a bigger story. I’m not an “IBM’er”, and the reader doesn’t run a hospital, but the amount of data private equity firms produce is alarmingly high. I use the word ‘alarmingly’ because it’s currently data exhaust, which I’ll define as data produced by the activities of these firms but that is wasted because it’s not in any usable form. You know what I mean: all of the presentations, term sheets and LPAs that have been scanned to a meaningless file on servers or in file rooms.

Just as police departments have the tools to analyze historical crime data with the goal of predicting the likelihood of crimes happening at certain locations and at certain times, today’s technology allows managers to understand any trends and patterns in the data they produce. I know what you’re thinking: ‘we don’t produce data’ or ‘we don’t produce enough data’ or even ‘the data we produce is meaningless’. Fair enough; I’ll concede we’re not talking about datasets the size of those hospitals produce. But I’d argue the trends you could derive from your data are every bit as important.

Suppose you’re looking at a certain later-stage manufacturing business in California. You’re well aware you looked at the same company two years ago and that it was – at the time – just too early. But now you’re interested in seeing how (or if) revenue and EBITDA have grown since then. But you don’t stop there – like a diligent manager, you’d like to know how this company’s growth stacks up against other comparable companies you have data on.

Where will you turn? Will your analysts and associates spend hours combing through your file room to find the company’s pitch? Will they ever find the other, less-formal data points you could have captured on comparable companies you immediately turned down?

Obviously having this data it in a searchable database yields efficiencies not seen in standard issue notepads, scanned PDFs, or perhaps even the model the company provided you with two years ago (but which was filed in the wrong server folder and can’t be found). Once that bit of information is stored in a structured fashion, not only do we know where it is, it becomes a piece of data in a much larger data set – allowing everyone to see how the company is performing, compare its revenues to revenues of peer companies, or even derive that something happened over the last two years that shot manufacturing growth up for companies like this one. Oh, and instead of having your analysts and associates digging through your file room, get them on finding more companies like this one!

If you’re not capable of doing this with your data, don’t worry – not many firms are. But, as the area where we expect to see the most growth, somewhere the savviest of managers are working on it.

INCREASED EFFICIENCY 

I remember well my days as a private equity analyst, spending hundreds of hours late at night, ‘alt-tabbing’ between multiple reports, pulling information from various sources and pasting them into presentations and quarterly reports. In hindsight the amount of time my colleagues and I spent compiling these reports is saddening. And just as the process seemingly wrapped up, we would turn around and do over again two or three months later. Storing data in a structured format can turn report building into a click of a button instead of a two week siege that takes hundreds of man hours and that kind of efficiency gain is hard to dismiss.

Some may doubt the feasibility of creating a quarterly report with the click of a button, but we have clients who do it regularly. It all depends upon storing the data in a structured database rather than on a shared server, in spreadsheets, or in PDFs. And being able to find that information quickly and turn it into meaningful information quickly can eliminate the need for processes in the form of meetings, calls, emails, that were typically required to make sense of what everyone knew. In the end you do more faster, you don’t have to hire extra staff, you keep operating costs down, and you spend more time doing what you do best, rather than on hunting down data and building reports.

Perhaps the most important byproduct of this type of efficiency, however, is serendipity. If you go back to the dark ages before technology, two partners got together, they looked at a deal, and they made a decision whether or not to invest. What they may not have realised is that three of their analysts and their controller know that company and could have provided valuable insight that could weigh on that decision. Or perhaps they previously worked with someone who would have some insight. These are the kinds of details that can be captured through technology and that facilitate the kinds of happy accidents that can create huge gains for your firm.

LPS VALUE TECHNOLOGY JUST AS MUCH

Five years ago, managers had all the leverage. Returns were frothy, there was so much capital to put to work, the economy was doing well, and LPs had almost no choice but to get in line. Now LPs are gaining leverage and there are undeniable advantages for a fund manager in being able to demonstrate the kind of effective and efficient process that technology can provide.

When you show an LP that compiling reports takes one click rather than two months, you are demonstrating that your analysts can spend more time on financial models or researching potential investments. When you show an LP how much data you’re tracking, you can demonstrate that being regimented in tracking data is providing insights that lead to better investments.

If you consider how technology has changed the way we communicate, shop, or even watch TV over the last fifteen years, it’s easy to understand how investors could develop opinions on the effectiveness of a manager, even subconsciously, based on how modern their processes are. Do you mail PPMs or email them? Are documents emailed to you or shared through an investor portal? If a manager is still doing what it did 15 years ago, it’s pretty clear to the LP coming in.

Of course, in the end, the returns speak for themselves. But if you’re a new fund you don’t have historical returns to prove your worth, it’s more likely that someone will view you as a promising up and comer or future star if you can demonstrate that you’re systematically going about analysing these things. And if you are a more mature fund, a regimented and technology-aided process can buy you more time in the event of a down fund.

Remember when I asked you if you could remember who your best deal sources are over the last eighteen months? Let me ask you another question: do you remember what the valuations were of the later-stage, west coast manufacturing companies that you saw were? Do you remember how those valuations stacked up against those you saw over the previous 18 months? Of course you don’t; that’s the type of thing we use computers for. If you aren’t using computers for that, there’s an upstart firm somewhere that is. 

Jeff Williams is a product manager at Application Experts (App-X), a provider of web-based software solutions for alternative asset fund managers and investors.