Private equity (PE) faces many of the same disruptive changes that have affected other industries. A combination of new, often non-traditional players and a growing number of traditional funds are paying higher premiums for companies and driving up overall prices, with no end in sight. In the past decade, the number of funds raising over $500 million has exploded from 37 in 2011 to 104 in 2021.1 Dealmaking volume, spurred in part by low interest rates, has surged 180% in the same period to record levels.2 To add difficulty to the PE firms’ ability to do business, growing talent demand from funds is outweighing the supply of qualified personnel — meaning there are fewer people with expertise to guide companies through the life cycle of a deal.
Moreover, competition for top talent is so fierce that paying top dollar — something most PE firms have traditionally resisted — may not be enough. Prospective employees tend to expect training, a career path and advanced environmental, social and governance (ESG) and diversity, equity and inclusion (DE&I) programs, not just promises. To develop those programs, many portfolio companies will need to gather new types of data, digitally transform their operations and become far more transparent.
1 PwC analysis based on data from Pitchbook
The traditional PE model relies on tried-and-true methods that can fall short at every step of dealmaking in today’s superheated, competitive environment. That means firms using traditional methods risk overpaying for a deal and seeing companies underperform during the hold period. Here’s why:
The key is data. While it’s abundant in every company, it is often ignored, misunderstood or misused. It’s a secret weapon that can solve for several issues at once. Massive growth is putting more eyes on PE firms, and building a data strategy can solve for the market’s transparency demands and can help transform your business at the portco level to create the returns investors expect.
In a word: speed. The right financial, commercial and operational data, delivered in a timely way, can help firms navigate strategic shifts or pursue a current strategy more aggressively. The right data means that CEOs and CFOs don’t spend as much time parsing through spreadsheets, freeing them to use their time to enhance value and stay competitive.
Many executives spend time refining already-sophisticated business plans, but may lose sight of what’s driving real value creation. That’s where data is critical. PE firms can find their data too scattered, or they may lack the talent and digital prowess to productively harness and integrate their data. This often just requires a willingness to use new sources of information and analysis that can make better use of data that is already available.
Having data in hand is one thing, but can you analyze it? That may simply involve leveraging a few new, strategic digital tools. Employees at funds and portcos must also track the right data to identify issues and opportunities early. That’s a talent issue that grows more critical over time. Building these capabilities on data analysis can force you to rethink your traditional PE model from the ground up. If you have the ability to do deep analysis into a prospective company before you get a single piece of due diligence data, why would you continue using the same playbook as everyone else?
Making data part of daily operations starts with determining your existing capabilities and improving those. By changing portco data collection, how and what data they analyze, and empowering their workforce to use data, you have the potential to make digitization a major differentiator from competitors and make portcos more attractive on exit.