If you had a key that could unlock a shortcut to business achievement and professional success, wouldn’t you use it? The obvious answer would be yes, of course — but today, some private equity firms are fumbling with the metaphorical lock.
Big data and advanced analytics pose an incredible opportunity for growth and achievement in the private equity sector. In a financial landscape where assets are expensive, deals competitive, and stakes high, the strategic insights that advanced analytics can provide are clearly invaluable.
As one writer for Bain & Company frames the matter, “These emerging technologies can offer fund managers rapid access to deep information about a target company and its competitive position, significantly improving the firm’s ability to assess opportunities and threats. That improves the firm’s confidence in bidding aggressively for companies it believes in—or walking away from a target with underlying issues.” If leveraged correctly, these tools can help PE firms swiftly parse vast quantities of business data and develop the insights that investors need to make timely, well-optimized investment decisions — and, ideally, achieve outsized returns for their capital.
Moreover, data analytics can help private equity investors develop these well-informed strategies quickly. In the past, investors bore the brunt of the administrative burden as they gathered and reviewed data for prospective deals. Now, however, investment professionals can shift that responsibility onto advanced data processing tools and make better use of their limited time and resources. To borrow a quote from Olof Hernell, Chief Digital Officer at the Swedish private-equity firm EQT, “We as an industry spend a lot of time manually gathering data and manually doing predictions. And of course that’s better done by technology.”
The clear benefits of the technology have driven widespread adoption across the investment sector. According to statistics compiled by the Wall Street Journal in 2018, a full 77 percent of private equity executives used data analytics while conducting due diligence, and 68 percent relied on it during buyer negotiations. Researchers for Ernst & Young further estimate that three-quarters of PE firms have access to tools that enable standardized reporting across their portfolio, and two-thirds can use data analytics to assess portfolio performance in real-time.
The private equity sector can see that advanced analytics offers the “key” to unlocking future success. However, in many cases, private equity firms haven’t used the technology to its fullest potential — or even begun to trust it.
“There is a lot of, ‘he said, she said,’ and ‘hey, what’s going on out there,’” Ryan Bulkoski, a recruiter with the firm Heidrick & Struggles, told reporters for Business Insider. “What I see less of is firms pulling the trigger.”
Private equity is somewhat notorious for being slow to incorporate new technology into their usual workflow. Some reports indicate that private equity firms are hesitant to fully commit to new technology because the technology is still relatively new and unproven. However, a lack of skills and technological know-how may be the most significant barrier that investors face today. According to the above-mentioned EY report, less than a quarter of all surveyed private equity investors feel as though they can “use data tools to position and validate their businesses for potential buyers.” Only a third believe that they “are very effectively managing portfolio businesses real-time and capitalizing on customer and margin opportunities.”
Without technical knowledge and support, private equity firms will never be able to take full advantage of available technology. Data analytics tools are not point-and-click solutions — they need to be implemented by a team of highly specialized and trained data science teams. As one writer for Business Insider noted in a recent article, “Private equity will need to be more inclusive of data scientists and engineers if they would like their analytics to actually work — hiring them to work as investment professionals, and not just as operating partners who traditionally have not held as much influence in a firm.”
To be fair, some of the sector’s largest firms have taken steps in the right direction. In early February, the Blackstone Group hired John Stecher, Barclay’s former CTO and Chief Innovation Officer, as their chief technology officer. Global investment management firm Neuberger Berman took a similar tack by hiring a chief data scientist and establishing a team of quantitative analysts to support its financial decision-making. The smaller private equity firm Two Six Capital has gone even further; since its founding in 2012, the investment firm has relied on analytics professionals and academics to generate investment insights and guide decision-making.
Embracing a data-driven mindset — and not just adopting data-driven tools — must be a priority for modern firms. Private equity organizations of all sizes need to rethink not only what they invest in, but how they generate investments altogether. They will need to recruit data specialists and build out organizational structures that will support teams of investment-savvy analysts. The firms that take the initiative to incorporate advanced data analytics into their workflow will be the ones to succeed in the future. Those who attempt to cling to old skill sets and refuse to hire for future prerogatives will, inevitably, find themselves unable to compete in an investment landscape that runs on fast-paced data analysis.
One point is clear: Private equity organizations will not reap the benefits of innovative technology unless they make similar updates to their workflow and employee base.