The secret behind Private Equity alt data decision making
Private Equity acquisition and holding firms are using alt data to help paint a picture of the true financial and operational state of non publicly traded entities
In this article we will discuss:
- How PE funds are utilizing alt data
- Which alt data is providing the most value
- Evaluating new and existing investments using alt data
How PE funds are utilizing alt data
Private Equity funds are using alternative data to inform their end-to-end investment cycle:
Identifying new investment opportunities
PE firms are all about identifying new industry trends and developments. They tend to look for corporations that can benefit from their expertise and perspective. But in order to identify these new opportunities fund managers need on-the-ground, user-generated data. A good example of this would be a PE firm looking to take advantage of the shift from working in an office space to a work from home approach. Said firm may collect alternative data in order to determine:
- Which companies have moved their employees to a work-from home model (Satellite imagery of office buildings, and low electricity consumption could be indicative of this).
- Which office space areas are most ideally located for repurposing to residential spaces (this can be discerned in part by social sentiment data, for example)
PE firms can use alt data to pick up buildings including hotels and shopping malls at under market value while identifying a new market demand before actually making any concrete monetary commitments.
Granular company analysis
PE firms are typically looking to find a company being sold at below market value. Usually this devaluation was caused as a result of a variety of trends. The board may insist that sales are declining due to rusty infrastructure and this may very well be true. But with alternative data firms can research other reasons for a decrease in traffic such as failing digital marketing, monitoring digital points of sale, and product delivery times. With a broader view of a retailer’s failings in hand PE executives can better ascertain if this is a project they can breath new life into or if it is better left untouched.
Driving corporate value
As mentioned, most PE firms have something to bring to the table. This could be an expertise in bringing bricks & mortar retail online or creating a more engaging and personalized experience with customers in motor vehicle dealerships, for example. More often than not the focus is on building on a previously untapped aspect of a business. But in order to identify this opportunity, PE firms need to monitor user behaviour and interactions with their brand and products as well as with competitors. For example, a luxury car brand may be able to increase sales by collecting data on user digital behavior. Are customer interacting with ads, social content, and search results on the basis of price or technical capabilities? Or do purchases stem from a more emotional place which can be translated into a higher converting user experience?
Which alt data is providing the most value
PE investors are mostly looking for correlating data, they are using alt data to understand the inner workings of a particular business, how certain industries are developing/changing, as well as actively managing corporations in their portfolio.
PE market research needs to be up to date while simultaneously helping them look 5-10 years back and into the future.
As such Private Equity investors are looking more closely at qualitative data. They are looking at alt data to answer specific questions such as:
Is this specific company or industry adding jobs YoY or not?
This may include collecting data sets from company profiles and job listings on sites like LinkedIn and GlassDoor.
Which technologies are successfully disrupting this market?
This may include collecting eCommerce sales volume data of product A vs product B or by collecting new patent registrations such as is common with firms following tech companies like Apple
How much investor interest is there in this company?
This may be determined by collecting data from sites like Crunchbase and other sites that can provide a closer look at investments, funding information, founding members as well as mergers and acquisitions.
Evaluating new and existing investments using alt data
Alt data is especially important to PE investors as their activity usually pertains to off market, nonpublic business assets. Here are a few quick tips to help you get started:
- Identify which alternative data sets will have the most value for your next investment (footfall data?, Point of Sale (POS) data?, geospatial data?)
- Narrow down the target sites you deem necessary to crawl. Instead of spreading yourself thin – decide on 5 sites where your customers and/or competition frequent. For example, a travel business may look at one search engine, one Online Travel Aggregator (OTA), and a handful of travel-oriented social media groups.
- Focus on data that will promote your fund’s unique investment style, for example, a quant fund may be highly focused on stock market data, piece-to-earnings ratio, and Discounted Cash Flow (DCF) valuations.
What does the future look like for alt data-driven PE?
As Private Equity firms continue to vie for undervalued companies with high long term potential, alt data will continue to serve as a pivotal factor for successful acquisitions, business development and exit strategies. Qualitative questions which could once only be answered by industry experts can now be confirmed by real-time consumer trends, and competitor activity data using sophisticated yet targeted web crawling tools.