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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 U.S. PE firms agreed that they have a clear data strategy in place.
Yet, 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 advancements around sourcing, standardizing and visualizing private company data, they haven’t yet applied insights derived from the information in a meaningful way.
The largest gap is in sourcing investments. Most PE firms have not found the right way to integrate data analytics into the deal origination process. In the Mergermarket survey, only 3% said data analytics produces noticeable benefits in this initial phase of their dealmaking process, while 43% ranked it as the top area where firms expect to see benefits. These survey results track with prior industry research conducted by S&P Global, in which only 14% of respondents reported their organizations are actively leveraging data science to automated deal sourcing and due diligence.
What is holding them back? For all advances made in the availability of private company data, an industry view on the total opportunity set of investable companies remains fragmented and imperfect. This “investable universe,” which may contain up to 10 million private companies globally, remains difficult to segment and analyze, at scale.
The private credit market provides another interesting example, though in this case the information gap can create issues when 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 study of credit investors and asset owners in the U.S. and Europe, 62% said they have difficulty examining the details of companies in their portfolios. Bespoke lending terms and limited access to private company financial reporting means investment managers must actively seek out critical data. As private credit allocations grow – the same study found that 46% of respondents expect to add investments in the coming year – missing information will be a problem for a widening group of LPs.
These examples are just a small subset of use cases that can be improved with better data transparency across the full universe of investible private companies within an organization’s existing and prospective portfolio. Unlocking these use cases, however, requires technology and expertise for investors to draw meaningful insights that scale across business functions.
Investors who can piece together a 360-degree view of the private investable universe to inform investment decisions within their own portfolios will unlock significant value in their deal flow process.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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