What Data Analytics has to Offer Private Equity Firms

Capital Markets CIO Outlook | Friday, September 04, 2020

Data analytics offers data-backed solutions enabling the private-equity firms to help investors understand the hidden potential of a portfolio company.    

FREMONT, CA: Private equity firms have always tried to gain investors’ trust by showcasing their operational efficiency, the performances of their portfolio companies, and other marketing strategies. However, lately, investors are getting increasingly involved in the background assessment reports of a portfolio company. Investors expect private equity firms to provide data-backed assessment reports highlighting the points that will convince the investors logically. The exponential rise in the number of private equity firms has further added to the challenge of attracting investments. Technological innovations can address the above issue. Technologies such as Artificial Intelligence and analytics have a massive potential to offer data-backed insights and facts that will make the task of attracting investors less challenging.

Increasingly, private equity firms are adopting digital analytics strategies that contribute to the various stages of the investment lifecycle. Analytics can be highly useful to deal with the complex issues in the diligence process and for the collection of portfolio key performance indicators (KPIs). Data analytics strategies allow firms to develop effective financial and operational business models and reports based on the data that is being extracted from ERP systems.

Conventionally, the data used by private equity firms had been confined to a limited number of sources such as the capital market sector and the targeted portfolio company. However, current technologies allow them to gather data from other sources, especially those that are directly impacting the capital markets. Data analytics tools can be employed to analyze and process the vast reservoirs of the obtained data. Further, data analytics can also be deployed to analyze social media behaviors and to understand the motivations of the targeted customers.

Technology, coupled with proper data analytics solutions, will enable a private equity firm to realize various business factors such as the critical performance drivers, strengths, and loopholes in the data strategy, as well as future trends that will steer the business. The combination of technology and data strategy can also offer probable disruptions that might impact their portfolio company in the future. Data diligence will also assist the firms with legal cover-ups, such as their due diligence processes. Focusing on due diligence processes along with analytics will enable the private equity firms to comprehend the pricing of the target better.

Segmentation is another area where data analytics can be useful incorporation. Segregating the client bases, restructuring the product ranges, and marketing strategies are some of the many areas where data-driven segmentation can add value for the private equity firms. Data analytics-driven segmentation can also allow the equity firms to implement 'buy and develop' strategies by identifying the latest features as implied by the historical data sources. 

Data analytics is an important tool when it comes to benchmarking a portfolio company. A private equity firm can present a detailed report of their portfolio companies’ anytime an investor asks for it. Usually, maintaining an updated record of the performance of a portfolio company would require a significant amount of time as well as resources. Despite such an effort, the reports were often not up to the mark as manual efforts could track the performances only at a particular point in time. However, with effective data analytics, the time, as well as effort, can be minimized.

Moreover, investors can be offered a real-time performance report of a portfolio company with analytics. The data-driven benchmarking approach is both effective and reliable as it can track a company’s performance throughout its journey. Further, the investors will also find the data-backed report to be more genuine and would be more likely to invest.

Thus, data analytics has unprecedented advantages for private equity firms. Incorporating data analytics will enhance not only an equity firm's efficiency but also the potential to gain investors. The private equity firms that will invest in data analytics solutions today will save significant money as well as have more chances to find a potential investor.

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