Thanakorn Lappattaranan/iStock via Getty Images
Private equity fund managers are increasingly prioritizing the internal adoption of data analytics. In a recent survey conducted by Mergermarket on behalf of S&P Global Market Intelligence, 90% of senior executives at US PE companies agreed they have a clear data strategy.
But this confidence belies a much less sophisticated use of data in key areas such as deal sourcing and asset risk management. While both GPs and LPs have made significant strides in sourcing, standardizing and visualizing data from private companies, they have not yet applied the insights derived from the information in a meaningful way.
The biggest gap is in the sourcing of investments. Most PE companies have not found the right way to integrate data analytics into the deal building process. In the Mergermarket survey, only 3% said data analytics deliver noticeable benefits in this early stage of their dealmaking process, while 43% identified it as the top area where companies expect benefits. These research findings are in line with previous industry research conducted by S&P Global, in which only 14% of respondents indicated that their organizations are actively using data science for automated deal sourcing and due diligence.
What’s stopping them? Despite all the progress made in the availability of private company data, the sector’s picture of the overall set of opportunities for investable companies remains fragmented and imperfect. This “investable universe”, which can contain up to 10 million private companies worldwide, remains difficult to segment and analyze at scale.
The private credit market is another interesting example, although in this case the information gap can create difficulties in systematically assessing risk. In the context of a large portfolio, basic information about borrowers is often missing, even after an investment has been made. According to a recent Coalition Greenwich survey of credit and wealth owners in the US and Europe, 62% said they have difficulty examining the details of companies in their portfolios. Tailored loan terms and limited access to financial reporting from private companies means that investment managers must actively seek out critical data. As private credit allocations grow – the same survey found that 46% of respondents expect to add investment in the coming year – missing information will become a problem for an ever-growing group of LPs.
These examples are only a small subset of use cases that can be improved with better data transparency across the universe of private companies that can be invested within an organization’s existing and future portfolio. However, unlocking these use cases requires technology and expertise for investors to gain meaningful insights that are scalable across business functions.
Investors who can construct a 360-degree view of the retail investable universe to inform investment decisions within their own portfolios will unlock significant value in their deal flow process.
Editor’s Note: The bullet points for this article were chosen by the editors of Seeking Alpha.