Transforming private equity with data analytics
Krekar Kawani CA, Founder of Touchstone Advisory, examines how private equity firms are leveraging game changing advancements in data analytics to their advantage.
Data has been an integral part of human culture since the beginning of time. Humans going back as far as 40,000 years have been recorded using sequential markings by etching notches on sticks and walls. Therefore, the use of data is not new and has played a key role in human advancement over many centuries–from building the Giza Plateau to embarking on space explorations in the modern era.
In the context of private equity (PE), the power of data analysis is quite literally one of the most significant advancements the industry has seen since the invention of the Excel spreadsheet.
How does technology mesh with private equity?
Data analytics, the handling of raw data to formulate objective conclusions, has been known for its frequent uses in business: from human resources to sales to development and operations. It is a revolutionary concept that has provided many companies with the confidence to make important decisions, analyse trends, and generally optimise their performance. In the realm of private equity management, these capabilities are game-changing.
The effects of data analytics are best exemplified in the Californian advisory and investment firm Two Six Capital, a company that has pioneered its use in the private equity sector. Using the invaluable insight provided by data analytics tools, fund managers have access to high-quality information about the target company and the market in which it operates, allowing the PE firm to assess opportunities and threats more accurately. This enables the fund manager to bid aggressively for targets with high potential and walk away from assets with underlying issues.
While an EY study estimates that 75% of PE firms have access to the tools that enable standardised reporting across their portfolio, less than a quarter of all surveyed PE investors can confidently “use data tools to position and validate their businesses for potential buyers.”
Therefore, data analytics holds a special place in the hearts of PE firms that implement it in their practice, especially as it makes financial reporting significantly more transparent, consistent, and efficient. Outside of operational efficiency, data analytics grants corporate executives the insights needed to improve regulatory compliance in addition to better gauging the perception of their portfolio companies in the marketplace.
So, why now?
The answer isn’t quite as revolutionary as the technology itself, but these tools and systems are quicker, faster, and cheaper to implement–all reasons that seem to be driving adoption at unprecedented rates.
We will also need to address the elephant in the room: the economic and corporate influences from the COVID-19 pandemic. For much of the last year, most organisations have found technology to be critical to survival. And while these adaptations were initially made out of pure necessity, continuing these best practices seems to be the only way to drive growth and keep up with the competition.
PE firms of all sizes will need to rethink their strategies for incorporating technology into their processes. The firms that stand to gain the most are those that invest in data analytics to facilitate well-optimised investment decisions and achieve outsized returns on their investment.
Where can firms go from here?
In light of the impact of COVID-19 on the wider economy, the need for accurate financial and valuation reporting is a critical issue for PE investors. There is a growing trend of increased scrutiny for the governance of PE funds.
For a PE firm with dated practices still in place, it may feel a little foreign adopting new systems and operational standards to increase the efficiency of valuation processes, but this has proven to be an incredible investment for many firms.
Using data analytics tools, the investment manager can input all the necessary financial information about a specific asset and update this information on an ongoing basis over the investment life cycle. The data analytics software is then able to extract up-to-date market information about listed peers and precedent market transactions, as well as the broader consensus of the sector as a whole. This will enable the investment manager to track how well an asset is doing relative to the market and other assets in the portfolio.
The aim of data analytics is to achieve a consistent valuation methodology that is accurate and up-to-date. Investors can rest easy having up-to-date and well-supported conclusions provided by these streamlined processes.
Here at Touchstone Advisory, we have decades of experience in valuing private equity-backed assets. We can design bespoke data analytic models that are flexible, robust, and easy to navigate. We are here with you at every step of the way, helping you navigate complexity, so you can evaluate your options and drive better decision-making.
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With nearly forty years of technological advancements to pick from, private equity firms can save precious manpower from completing manual processes and tasks by automating them with digital solutions. If firms are serious about maximising their growth potential, data analysis is a massive step in the right direction.
This is not just about adopting data-driven tools but embracing a data-driven mindset across the board – a mindset that avoids the collection of “more data” and instead focuses on quicker insights. Ultimately, the pace of private equity advancements requires transforming large quantities of data into meaningful insights, resulting in well-supported investment decisions.