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The obstacles to better analytics adoption in private equity
24 June 2022
Private equity has made many achievements in putting data and
technology to effective use in the investment management process.
However, the industry has a long way to go, particularly in finding
ways to use more sophisticated data analytics to get a competitive
edge in deal sourcing.
Our recent survey of senior executives from US PE firms,
conducted by Mergermarket on behalf of S&P Global Market
Intelligence, revealed significant growing pains in technological
and analytical sophistication at many firms.
In the current competitive deal environment, investment in the
tools needed to spot new market trends may decide the winners. A
growing interest in the power of data, with 83% of respondents
saying the subject of "big data" has become more important at their
firm over the past two years, points toward a shift in the search
for profitable deals.
Advanced analytics have yet to be adopted in deal
sourcing
Respondents confirm that data analytics are bearing fruit in
selected phases of the investment lifecycle, particularly due
diligence (40%) and buyer negotiations (37%). "Investments in data
analytics significantly reduce the challenges of due diligence,"
reported one respondent. "Data checks are completed sooner and we
can analyze the information much faster."
Progress has been much slower in extending new approaches into
other areas of the investment process. Deal sourcing is a standout:
although 43% of respondents said that better data analytics could
bring the biggest benefit there, only 3% leverage it. Similarly,
only 10% of respondents incorporate data analytics into deal
pricing.
"We would be interested to see the use of data analytics applied
more strongly to deal origination," says one respondent. "There are
some challenges because of unsupported and unstructured data, but
advanced methods can improve the deal origination process."
Variable quality and consistency of data hygiene makes
like-for-like comparisons between target companies an imprecise
science; accurate data is fleeting. "We cannot always get the kind
of real-time information that we anticipate," explains one
respondent. "Data tends to become stale very quickly because of
fast market developments and internal changes in companies."
Organizational culture and resourcing slow
progress
Internal obstacles make data analytics progress slow across the
industry. For example, 30% of respondents cited insufficient
collaboration between investment decision-makers and data
scientists as the biggest roadblock to extracting value from
available data sources.
At the same time, the culture of dealmaking is slow to change
and PE deals are heavily relationship-based. The perception still
hangs that scouting companies and conducting due diligence require
human insights, rather than those derived from technology or
automation.
Organizational inertia appears more often in firms with AUM over
US $26bn, where 87% of respondents said problems with stakeholder
buy-in are the greatest impediment. "The biggest hurdle is
convincing decision-makers," says one respondent. "They rarely
contemplate the long-term value of investing in new technology
resources. They think more about the immediate expense."
At smaller firms, scarce resourcing is a bigger problem, with
few staff dedicated to technology or analytics tools to support
investment teams. With only one exception, respondents from firms
with AUM between US$6bn-US$25bn reported they employ five or fewer
people in these functions.
Preparing for a data-rich future
As the deal-impacting data available today becomes increasingly
robust, dynamic, and time-sensitive, PE firms must continue to
assess ways to put it to use effectively in order to maintain a
competitive edge. Firms that manage to close the data gap and
identify advanced tools for extracting key insights will
differentiate themselves in tomorrow's market.
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.