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Private equity reboots its approach to technology as competition heats up
08 June 2022
Private equity has reached a new stage of maturity in technology
and data analytics. The focus of investment has moved from
operations to investment teams, with a newly sharpened focused on
competing for dealflow.
Our recent survey of 30 senior executives from US PE firms with
at least US $2bn assets under management (AUM) reveals a new
reality of increased focus on big data and analytics. The survey,
conducted by Mergermarket on behalf of S&P Global Market
Intelligence, paints a clear picture of how the increased velocity
of the market has led many to look to technology for an edge in
deal sourcing and diligence.
PE firms have embraced technology — and are ramping
up for more
PE firms have used technology in investment operations for
decades, and the results of that continued investment were apparent
in the survey results. Respondents felt they have built a strong
data foundation, with 90% agreeing that their firms have a
long-term data strategy in place, and two-thirds agreeing
strongly.
The industry is moving beyond the basics and dabbling in more
sophisticated applications, with applications like CRMs now
considered table stakes. Their focus is shifting toward investment
team workflows and monetizing data analytics.
Firms have embraced analytics as a springboard for future
growth: 83% of respondents report that big data and data analytics
have become more important over the past two years.
Broadly, PE firms are ramping up their technical sophistication.
Firms are investing in more sophisticated tools to source,
validate, store, and manage data as they confront issues like data
fragmentation and sprawl. For example, enterprise data management
software is becoming a must-have, with 83% of respondents already
reporting that they utilize some form of data management utility.
More than half of respondents report that they now leverage machine
learning (60%) or AI (57%) in investment processes, either through
third-party products or in-house efforts.
Competition and value-creation now drive PE's digital
technology use
The survey data helps explain why PE firms are turning their
attention so strongly to digital technology-in short,
differentiation.
"Keeping up with competition is key. We cannot be the ones
disrupted as new technologies are introduced," explains one
respondent. The vast majority (90%) agree that increased
competition for assets is driving their firms to reassess their use
of data and technology, with just over a third in strong
agreement.
Overall, firms' investment in technology is focused on
generating value in the investment process, with 50% saying their
top goal is identifying market trends more quickly. Only 7%
identified long term cost savings as their first objective,
reflecting the higher adoption already in place for
efficiency-oriented business systems.
Private equity firms look increasingly set to enter the fray and
explore insights from a broader range of data sources, especially
when it comes to investment sourcing. Alternative data — such
as social media, videos, online transactions, mobile phones, and
satellite imagery — is opening a broader universe of
information from which to source deals. In addition to alternative
data, technology can now make sense of increasingly unstructured
data sets, which were previously inaccessible. In the survey
respondents claimed this capability made for more streamlined
negotiations and unlocked dealmaking creativity.
Certainty matters, too. One-third of respondents say that making
better decisions more quickly motivates their use of data
analytics, while almost 40% say it's their second priority.
The technology and data race heats up
Although respondents report that data complexity and expanding
staff skillsets present challenges for bringing data analytics more
fully into the dealmaking process, a race for new analytical power
is underway.
"When it comes to making investments, we have to be fast and
keep up with the market trends. We cannot lag behind the
competition," says one respondent.
Those PE firms who choose a steady state may lose out to faster,
nimbler competitors who are scanning the market with new eyes.
IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.