Data in private capital: not if, but when

True data analysis offers unprecedented insight, but private capital firms need help to use it to its full potential

We hear a lot about how data can disrupt the private capital industry. But very often that talk doesn’t translate to on-the-ground change.

Data analytics is the tool that the majority of fund managers in our recent survey The Future of Fund Technology saw as most immediately applicable and important to their business. Some 77% said that data analytics would be one of the two most important technologies for funds over the next five years. In fact two thirds already use data in some way.

For the rest, the opportunities that data mining presents are becoming increasingly difficult to ignore: data promises to save time and resources on back-office functions and help the front office make the right decisions for growth.

We recently gathered a group of experts for our panel discussion, Navigating the digital divide. Jonathan Balkin, founder and executive director of Lionpoint Group, consultants to the alternative investment sector, stressed that “the private equity industry is a relationship business”. He went on to say: “There’s not this sort of appreciation for how data can generate alpha across the organisation, but certain firms are really investing in tools and data science.”

Data can help firms churn through due diligence files and create operations side efficiencies. But it can also give deeper insight into portfolio companies – either those already invested in or potentials – and guide toward trends and opportunities for growth and scale.

Ad tech, insurance and oil and gas are all industries that have seen transformation through data, and largely that is because they already had large data sets to work with. For many private equity firms, exploiting data is more easily said than done. The challenge is first knowing which data sets to collect and how to collect them.

Data: long-term commitment in a short-term world

That’s a long-term commitment that sits uneasily with an industry that operates in shorter time frames. Some firms even collect data and throw it away – sacrilege in today’s climate. It requires imagination to cast forward and see the long-term value of data as something worth investing in now – a leap some private equity firms can’t take easily.

“To get value from data and analytics you have to have the data to then do the analytics on. But that takes time – to build history, fix quality issues and pull everything together in such a way that enables data science to be effective,” said Bill Murphy, managing partner at Cresting Wave, a technology outsourcing company. “It’s going to happen, it is just a question of whether it’s in the next five years or the next 15.”

The digital divide in private equity

At present, there’s a digital divide between bigger firms – who tend to have more resources to dedicate to data as a long-term commitment – and smaller firms, who don’t. In our research, 60% of funds with AUM of over $1 billion said they prefer to pioneer new technology, while smaller organisations reported that they are dependent on technology but, frustratingly, have to limit investment into it.

“The smaller the fund the more manual its processes tend to be, because of the cost of adopting technologies – costs that smaller funds will often prefer to mutualise through a third-party administrator,” said David Sarfas, head of private capital at Intertrust Group.

We know we need data in private equity, but how do we do it?

The cost barrier may soon come down, as data collection and analysis become cheaper. But it isn’t the only hurdle to private capital squeezing the true value from data.

Devising a system of collection, navigating and stitching together the numbers, taking metrics and producing reliable data that firms can use with confidence to gain really useful insights is a tall order given increasingly complicated company structures.

“That basic function and task is really difficult for our clients because they have not had the organisational discipline, rigor or even the resources to coalesce everyone into thinking this way about technology and data,” said Lionpoint Group’s Jonathan Balkin.

“That’s why a lot of our clients are stuck in this Excel world because you can put in a smart person who’s great at Excel to wrangle it all together, every week, every month, every quarter, repeatedly,” he added.

Right now, for reasons of cost and complication, data in the private capital industry is more likely to be used episodically rather than systematically – when it is used at all. And not enough use is made of automation, which could mean more streamlined and efficient operations.

But change is coming. Over the past two years Covid-19 and its resultant squeezes have forced firms to consider the benefits of moving beyond spreadsheets and into more sophisticated tools, in some ways following the lead of hedge funds that have seen success with data.

The question is not if data will come into play in private equity, but when. Once one firm realises data’s true potential, there will be a sea change in the way things are done.

Why Intertrust Group?

• As a strategic partner, we offer a full-spectrum service tailored to meet all back-office needs throughout the lifecycle of a private capital fund. This against a background of ever-increasing reporting demands.
• Our proprietary innovative technologies are combined with global knowledge and experience to deliver added-value services catering for all asset classes, while increasing manager visibility of portfolios on behalf of a fund’s investors.
• Our expert teams harness tools and cutting-edge technologies to eliminate costly errors in the handling of fund administration and corporate actions, investor relations and portfolio management.
• We offer bespoke solutions for funds of all sizes to meet administration requirements so they and their partners can concentrate on investor relations, fundraising, closing deals and profitable exits.
• We help funds to navigate the increasingly complex regulatory environment with solutions tailored by jurisdiction and specific compliance requirements.