As the data coming from company portfolios becomes vast and complex, a standard approach to private equity (PE) business analysis crumbles. It is no longer sufficient to get precise and data-rich insights to measure, track, and grow the performance of your company portfolios. As technology keeps evolving and businesses and their underlying operational models become more complex, making profitable and smart private equity investment decisions becomes even more daunting. Some key questions arise:
The other key pain points that need a data-driven remedy include operational efficiency, increasing market valuation, performing due diligence, etc. Furthermore, the ongoing pandemic has also led to a paradigm shift in the PE investment sector and investors are more positive about potential portfolio companies that can adapt to the market changes as well as stay on the growth path.
All this compiles into a highly relevant and massive use case umbrella for data analytics or private equity analytics. Combine that with automation and digital transformation and we have a very thought-provoking discussion topic: the rise, challenges, and applications of analytics and automation in the PE sector. Let’s explore the various ways analytics can help both companies as well as investors to make well-informed investment decisions.
A recent study published by Deloitte identified the huge potential and different applications data analytics offers in private equity investment decision-making. The study outlined seven key points that make data analytics extremely relevant and crucial for investment decision-making.
Data and analytics are the key drivers of success when it comes to tech startups and organizations having their roots or branches in IT. These companies are spurring worldwide disruptions and giving birth to innovative and digital business models. Some common examples include Rocket Loans and Quicken Loans, where approvals for mortgages and loans are given based on simple and automated processes.
These companies are more relevant for data analytics-based investment decisions, as data is readily available in the ready-to-process form. However, even brick-and-mortar establishments can respond to technology-enabled disruptors. Such is the power of data analytics and automation!
Automation and data analytics can offer three major benefits for the digital transformation of private equity investments (PEIs), which are discussed in detail in this section of the article.
Investors can establish a preferred vendor approach by adopting a hybrid model for investment decision-making. This hybrid model can help investors develop better governance policies and performance expectations and calculate better scale efficiencies. Hence, the investors can see the projects running behind schedule, or the companies running over budget, or identify the other key problems that are leading to unprofitable businesses. Thus, the investors can change, manage, or increase investments in their portfolio companies in a better and data-driven manner.
Volatile cash flows can not only amount to outstanding loans or debts, but they can also drag massive investments down as they crash or become a steady drain of resources. Using predictive analytics in association with quantitative and qualitative studies done specifically on portfolio companies can lead to highly consequential results or data insights. Investors can see how well their investments are going to be used or are going to spur results in the long run. They can conduct these studies again after some time and compare the results with the previous analysis to identify any hidden patterns or discrepancies in the reports. Such comparative studies will also help them in understanding the various points of concern that arise over time and whether they can escalate into business risks or not.
Almost all PE investors are prone to the common occurrence, where the same brand is yielding different returns in different locations. While some branches tend to bring higher revenues, others fail to even stay afloat. In such cases, data analytics can be of immense importance as it can help in collecting, processing, and evaluating multiple types of data, such as:
Thus, data analytics is of extreme importance and can have many amazing and crucial applications in PEI decision-making for better returns. Up next, we discuss the three major trends in PEIs that are all set to transform the sector and reinforce the hold and relevance of data analytics in the sector.
Below, we discuss the various reasons PE stakeholders, right from PE firms to investors, are looking for data analytics-based solutions for key decision-making and strategizing.
Given the massive change spurred by the COVID-induced meltdown, the roles and responsibilities of PE CFOs have seen a major revision and evolution. CFOs now need to be more tactical, technical, strategic, and empowered with insights stemming from data and analytics rather than hunches or business acumen. Recent studies done by E&Y suggest that 78% of CFOs are looking for raising larger investments that have led to a serious race for assets among investors. So, PE firms are looking at ways to make more strategic decisions, in terms of capturing investor allocations for alternative investments, such as:
All this requires a heavily data-driven mindset and resourcefulness that screams for data analytics-based offerings such as software tools, analytics apps, or custom SaaS offerings.
Amid the increasing skill gap and the Great Resignation, and COVID-wave scares, companies are also focusing on increasing workplace engagement and employee motivation to retain and enhance their talent profiles. Studies reveal that 73% of PE managers focus on employee productivity and engagement for talent management. Talent management activities and attitude require an immersive understanding of the various factors that influence the entry and exit of an employee, such as:
Such specific decision-making further creates the grounds for embracing data analytics to gain visibility into the granular level of organizational operations and processes.
Within a short span of just four or five years, the digital transformation and innovation vision of PE companies have changed from mere adoption of smart tools or software to make the best possible use of data collected via these tools. Policymakers and key investment decision-makers no longer want a smarter way to collect data, but an agile, smarter, and more efficient way to make the most of all the data they continually generate and collect.
They wish to know how to use this data to find the operational and process gaps and discover the various pitfalls their investments are or might be facing with the current state of affairs. They wish to bring every person on board with their digital transformation attempts and contribute to bringing innovation and process improvement home with equal alacrity and motivation. Hence, data analytics yet again emerges as a mighty savior for all these concerns and expectations.
Now that we have covered the application areas, use cases, and various ways data analytics can benefit investment decision-making in PE firms, let us move ahead. We explore how to use data analytics for gaining better investment insights to get better returns, and how to get started with the adoption.
Instead of entering into any handshake deals or hunch-based decisions, it is important to complete the due diligence and the pre-deal data analysis. With this approach, prospective buyers can keep themselves safe from fraudulent claims or from investing in deals that are too good to be true and end up draining their finances. They can also assess and understand the target company claims, as well as refine the key valuation model inputs. Using data analytics at this stage will also help them to identify the commercial opportunities or risks associated with the investment they are going to make.
No matter what the PE firm aims at for value creation—market positioning, emphasizing sustainability, operational changes, cost reductions—keep everything in line with the data. Having a data-centric approach will not only take away the guesswork from the entire process, but it will also help in:
Thus, your value creation decisions become more sustainable over the entire lifetime of your investment, and you can get better and higher returns in a sustained manner.
Make use of data analytics by getting data-rich insights for more effective performance monitoring. Monitor the data exhaustively, track progress as per the value-creation plan, and leverage that information to accelerate performance or resolve issues, such as the ones discussed below.
Investors are now looking for more compelling and convincing exit stories alongside investments plus points. They have become less patient with the pandemic-induced market changes and wish for an exit scenario that is as easy as entering an investment. While PE firms can use data analytics to create such compelling exit case scenarios for investors, the investors can also use data analytics to confirm these claims. Thus, data analytics will facilitate a more convincing and fairer ecosystem for all the stakeholders, where every decision is a conscious and well-informed step stemming from reliable and robust data.
As important as it is to embrace data analytics, doing so in the right manner and with the right people is also crucial. Otherwise, you might end up with mountains of confusing data piles that just equate to clutter and noise. Investing in the right tools, the right technology, and the right partnerships is the perfect catalyst for making the most of your data analytics efforts and endeavors when it comes to the PE industry. Hence, we recommend opting for data analytics consultation with experts that have an extensive and exhaustive understanding of the PE industry and data analytics trends.
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