The private equity industry is one that is not known for being risk-averse. Executives are dealing with large quantities of money and with important clients who take their privacy and their data seriously. This means that those in the private equity industry will take risks with new tools or “toys”.
Even so, a growing number of big data companies are coming to appreciate the value of big data and business analytics. They are using these tools to create value and improve their offerings.
Business Analytics in the World of Private Equity
The growth of business analytics in the private equity world is something that, in many ways, should be familiar to those who have watched other markets evolve. It is similar to the 1990 growth of big data in the public markets. Learn more about the history of big data here.
The use of big data techniques will, eventually disrupt the industry just as it disrupted hedge funds. The companies that get on board with big data today will be in a strong position to take over the markets.
Working Smarter and Faster
J. Taylor Crandall, one of the founders of Oak Hill Capital Partners, told The Middle Market that data and AI are two necessary tools for private equity today. In the past, data was not widely available, so companies, shockingly, ran on intuition alone. Educated guesses can often be correct, but they are still guesses. Today, the data is there, so there is no excuse to guess. Every time you do something online, it produces data for someone to use to analyze their business. Every time you buy something, the company that you bought it from gets data. Analytics is the low-hanging fruit that allows private equity leaders to create value from the portfolios that they manage.
Data and analytics make it easier for companies to scale their investments and to improve their operations. Take the example of Two Six Capital. This company has had access to more than $100 billion worth of granular, transaction-level data. It used this data to compile statistics that feed machine learning and to reveal the true intrinsic value of companies.
This kind of data can be invaluable for making decisions at a boardroom level. It helps to inform decisions about sales and marketing, budgeting, R&D and more. For investors, it helps to highlight where companies are growing and where revenue opportunities are. It makes near-term revenue predictions so much easier.
Data is Driving a Digital Transformation
According to research conducted by Prequin, private equity buyouts hit an all-time high of 5,106 deals worldwide in 2018, for an aggregate value of $465 billion. Private equity managers are under pressure to identify potential buyout opportunities and new angles for their operations so that they can continue to provide reasonable returns for their investors.
It’s not easy to make these large decisions quickly without access to high-quality data. New tools such as high-performance computing, artificial intelligence, machine learning, and big data analytics are the key to the digital transformations that are happening in the private equity industry.
To fully utilize these tools, however, companies must have a solid digital foundation. This means blockchain, cybersecurity, mobile working and cloud solutions. While these ideas are old hat in some sectors, to a private equity leader who still relies on an Excel spreadsheet, these concepts can require a leap of faith.
The future is inescapable, however, and private equity firms would do well to start learning about and investing in digital tools. There are consulting services that can help provide information to companies who want to improve their products and services. Even if they are still at the due diligence stage, planning for analytics today will lay the foundations for a digital future.
PwC recently highlighted the importance of digitalization in a report, emphasizing that private equity firms could benefit from digitally-enabled products and services to collect data, improve customer targets, and develop new products and services.
If your business is interested in making better use of big data and analytics, it makes sense to work with a digital transformation expert who can help you to identify the data that you have access to, and understand the questions and problems that data could solve.
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