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Why the SEC could be looking at alternative data

There are potential conflicts that could surface with the use of alternative data in private equity.

The Securities and Exchange Commission could start looking at alternative data obtained by private equity firms, according to market sources.

What are alternative data? They are sets of information gathered from non-traditional sources, and acquiring them involves looking beyond financial data or insights gleaned through regular due diligence.

One example would be if your firm had interest in investing in a shopping mall and you found out – either through someone in your firm or by buying data – how many cars had been in and out of the mall, how many people walked into Starbucks between certain hours, and how many shipping trucks are coming in and out of the vendors.

The SEC did not respond to our request for comment on the subject. However, there are two reasons why alternative data are likely to be on its radar.

Reason one: conflicts of interest

If you are hoovering up proprietary data from one of your funds’ existing portfolio companies – say, occupancy rates from a hotel chain – and using them to inform investment decisions for a separate fund you manage, this could constitute a conflict of interest. This is because these valuable sets of data are owned by the portfolio company in question or the fund’s investors.

Reason two: data provenance

Sticking with the theme of hotels, one market source recently described how an investment firm had hired a hacker to break into a well-known booking site to access occupancy rates – valuable data for anyone considering an investment in the sector. Investment teams should question the provenance of the data they are being presented with.