Many private equity (PE) firms have successfully used years of deals and industry experience to find and create value. But rising asset prices and the competitive nature of the market can make it risky to rely solely on these methods. Some firms are turning to a data-driven approach and advanced analytics to find an edge in the market, using a combination of company-generated and alternative data (third-party data) to drive decision-making and generate the returns a majority of investors demand across the investment life cycle. We see an opportunity for firms that leverage data to frame a portfolio company (PortCo)’s equity story in a compelling way for both stakeholders (limited partners (LPs), investors and management) and potential buyers, whether you're considering an acquisition, implementing a value creation plan, monitoring or developing an exit strategy.
PE firms increasingly look to data and analytics in both the pre-deal and due diligence phases to inform decision-making. Through this approach, prospective buyers can confirm or challenge target company assertions, refine key valuation model inputs and identify commercial opportunities and risks.
But, this is only the beginning. Given how fast and competitive the market can be, PE firms are looking beyond target company data, using alternative data sources to educate themselves on the market and refine their investment theses. Alternative sources can also help buyers understand and analyze a target company’s data, since not all target companies track or produce the same quality and depth of data.
We are starting to see this approach used more often by PE firms. For example, we’ve seen a PE buyer leverage third-party online sales data to better assess category trends, pricing and the impact of promotional spend on top-line growth. This type of application of external market data can help validate assumptions about a brand and its competition before pursuing an asset in the market.
Whether a PE firm plans to create value through market positioning, operational changes, emphasizing sustainability and cost reductions, a data-centric approach can help speed up execution, drive accountability through tracking and identify new growth opportunities.
For example, data and analytics can help make firms’ value creation decisions more sustainable over the life of an investment in a company. PE firms often pursue cost reductions to drive quick EBITDA improvements early in the hold period. Although cost reductions do not always require sophisticated analytics, the ability to blend financial, commercial and operational data can help provide deeper insights into the PortCo’s operations and how the company compares to its peers. With broader data sources and more sophisticated analytics, firms will likely understand markets better, uncover customer behavior and trends, and maintain competitiveness throughout the PortCo’s life.
This part of the investment cycle is also an opportunity to look for new, unexpected opportunities — especially in the early stages of the hold period — to capture additional, otherwise hidden, value. Consider a PE asset in the hotel business, where many property operators may track only the most basic information about its guests. A PE firm might help its PortCo find new ways to gather more direct and indirect data about guests and their experiences. In doing so, the business could develop insights to attract new guests, find ways to lure back guests who had abandoned the franchise, extend the length of stays and increase the use of hotel amenities — all of which drive value.
Firms can also use data more effectively when monitoring performance. Once a PE owner and a PortCo develop and implement their value creation plan, they should monitor data, track progress against the plan and use that information to help accelerate performance or spot problem areas:
For example, we know a consumer health products portfolio company that leveraged dynamic reporting to better understand, monitor and optimize performance. Through connecting existing data across disparate systems, the company was able to analyze SKU-level sales/margin across all key dimensions (e.g., business unit, customer category and product category). Through a more analytics-driven SKU management approach, the management team was able to drill into the key drivers to make more informed business decisions around its products, customers and pricing.
At exit, PE firms can use data and analytics to support the “equity story,” demonstrate the value created at a PortCo during the hold period and enable buyers to more efficiently analyze the business throughout the entire sale process.
Potential buyers understandably ask lots of questions during a diligence process. With a solid, data-driven approach in place, PortCo’s may be able to provide information to buyers faster and easier — and even help to package the data they expect the buyer will need. This approach can help instill confidence, avoid surprises and even likely move buyers toward making bids sooner.
For example, we know a commercial services company that grew through acquisitions and only tracked basic information across its acquired and legacy business units. Disparate systems and disconnected data made it difficult for management to demonstrate the value of these “bolt-on” acquisitions and how those acquisitions made real pull-through opportunities for the company. Through integrating business unit data into a common platform (without a massive system overhaul), the portfolio company was able to bring its growth strategy and margin expansion to life. This enhanced business intelligence can help a PE firm tell the story of PortCo’s strategy for potential bidders upon exit.
As important as experience is, experience alone won’t win the best deals and generate the best returns in the current market. In fact, it’s becoming increasingly difficult for firms to stay competitive if they don’t build a rigorous approach to data and analytics into their process. Fortunately, data techniques have a kind of flywheel effect: the more you use them, the more you’ll spot additional opportunities to apply them anywhere in the investment life cycle. In virtually any industry and at any stage, PE firms can help unlock additional value with data-driven insights that others haven’t spotted through experience alone.