Insight Out, February 2019

Big Data, the next leading edge of Private Equity firms?

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Historically, Private Equity firms have put the relationships and the human connections at the heart of their deal sourcing. Partners and deal teams were continuously asked to expend their network to identify new opportunities of investments. The ongoing creation of data everyday combined with the new technologies to use this data is currently disrupting the way Private Equity firms source their deals. Just like in the public markets 20 years ago where we have seen hedge funds building their trading strategies on algorithms, Private Equity firms will most probably have no other option than using Big Data and analytics to drive investment decisions and generate competitive returns for their investors. While this view has already been endorsed by a few firms (especially in the Venture Capital area), it will take some time to become the norm in this industry.  

Overall, the digitalization of our day-to-day activities as individuals or as companies result in a continuous increase of data generated at multiple levels. Leveraging these data should complement all the fundamental and conventional processes of the Private Equity firms. Together with adequate and efficient technologies, it creates a unique and highly powerful tool to assist Private Equity firms in their core decisions.

The power of Big Data in the Private Equity industry is clearly relevant at different levels of the value chain. One should however point out the deal sourcing, the due diligence and the value creation as primary areas where tangible and immediate benefits can be brought.

Deal sourcing

The appropriate use of Big Data to source deals will entail benefits at different levels. Firstly, one can expect to increase significantly the deal flow (quantitative dimension) and enable Private Equity firms to spot targets which are not connected to the traditional network of the partners or the deal teams. Secondly, it should enable to rationalize the deal flow (qualitative dimension) to only include opportunities meeting several predefined criteria and result in focusing the efforts on the right targets. A concrete example is the use of social media analytics to track customers’ behavior towards brands and anticipate needs, and trends. We see many Private Equity firms active in the consumer business using those tools to better anticipate buzz generated by new brands and assess their potential. Overall, Private Equity firms who will use analytics will increase the granularity and the reliability of processes which have so far been human based.

Due diligence

Proper technology combined with the data should enable the Private Equity firms to better understand the target, its strengths and weaknesses, the key drivers of growth, profitability and performance as well as better benchmark the target versus its competitors and position it on the market on the basis of stronger and relevant KPIs. It should also enable the Private Equity firm to gain better insight on the disruptions which might affect their portfolio companies. In general, the due diligence process which has historically primarily focused on the past is broadening its scope with a more looking forward approach. Strengthening the due diligence process with analytics will ultimately help the Private Equity firm to better asses the pricing for the target.

Value creation

Companies are increasing the use of technologies to scale and improve operations and grow the revenue quicker than their headcount to increase EBITDA. Analyzing data from different sources should enable Private Equity firms to prioritize the areas to be improved at any level of their portfolio companies’ operations. Segmentation of client bases, redevelopment of product ranges, restructuring of sales and marketing efforts and rationalization of sales channels are just a few examples of corrective measures implemented by Private Equity firms and resulting from data analytics applied to portfolio companies combined with other available data source.  It should also be a major accelerator for funds implementing buy and build strategies through the identification of potential add-on which would have historically been under radar. 

Towards a leading hedge, but for how long?

Overall, the use of Big Data at different stages of the transactions should strengthen the investment process and further unlock the value creation potential of portfolio companies. It will also generate a major shift in the mindset under which Private Equity firms have been operating for a long time. Finding the right balance between use of data and human insight and intuition might be challenging. It is however cleat that the big winners of tomorrow will most probably be those who will quickly adopt these technologies.  On the other hand, considering the pace at which our world is being digitized, it seems like those Private Equity firms which will not move in that direction might become quickly out of business as the general landscape under which Private Equity firms operate will be very different in the medium term.