Better data is the key to new opportunities in private markets

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Private equity fund managers are increasingly prioritizing the internal adoption of data analytics. In a recent survey conducted by Mergermarket on behalf of S&P Global Market Intelligence, 90% of senior executives at US PE companies agreed they have a clear data strategy in place.

However, this confidence belies much less sophisticated use of data in key areas such as deal sourcing and asset risk management. While both GPs and LPs have made significant strides in capturing, standardizing, and visualizing data from private companies, they have yet to apply the insights derived from the data in any meaningful way.

The biggest gap is in the search for investments. Most PE companies have not found the right way to integrate data analytics into the deal creation process. In the Mergermarket survey, only 3% said that data analytics produces noticeable benefits at this early stage of their trading process, while 43% ranked it as the top area where companies expect to see benefits. The results of this survey are tracked with previous industry research conducted by S&P Global, in which only 14% of respondents reported that their organizations are actively leveraging data science for automated deal sourcing and due diligence.

What is holding them back? Despite all the progress made in the availability of private company data, the industry’s view of the full set of investable company opportunities remains fragmented and imperfect. This “investable universe”, which can contain up to 10 million private companies worldwide, remains difficult to segment and analyze at scale.

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The private credit market provides another interesting example, although in this case the information gap can create problems when systematically assessing risk. In the context of a large portfolio, basic information about borrowers is often missing even after an investment has been made. According to a recent Coalition Greenwich study of credit investors and asset owners in the US and Europe, 62% said they have difficulty examining the details of the companies in their portfolios. Customized loan terms and limited access to financial reports from private companies mean investment managers must actively seek out critical data. As private credit allocations grow (the same study found that 46% of respondents expect to add investments in the next year), missing information will be a problem for a growing pool of LPs.

These examples are just a small subset of use cases that can be enhanced with greater data transparency across the universe of private companies that can be invested in within an organization’s current and future portfolio. However, unlocking these use cases requires technology and expertise for investors to gain meaningful insights that scale across business functions.

Investors who can piece together a 360-degree view of the private investable universe to inform investment decisions within their own portfolios will unlock significant value in their deal flow process.

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Publisher’s note: The bullet points in this article were chosen by the editors of Seeking Alpha.

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