Private equity (PE) firms are constantly looking for ways to improve their decision making and create value for their investors and grow the portfolio companies they invest in. Having the data is just one half of the puzzle; analysing it to meaningful inferences is the other half that can help PE firms achieve these goals.

The Evolution of Data Analytics and Reporting in PE

Traditionally, PE firms relied on their experience, intuition, and industry knowledge to make investment decisions and monitor their portfolio performance. They also used, and continue to use, spreadsheets and manual processes to collect, analyse, and report data to their investors and stakeholders. However, this approach had several limitations, such as:

• Lack of timely, accurate, and consistent data across different sources and systems
• Difficulty in aggregating and integrating data from multiple portfolio companies and funds
• Inability to capture and leverage granular and alternative data, such as customer behaviour, social media sentiment, and market trends
• High risk of human errors, data breaches, and compliance issues
• Limited scalability and flexibility to adapt to changing business needs and market conditions

With the advancement of technology and the increasing availability of data, PE firms have started to adopt more sophisticated and automated solutions for data analytics and reporting. These solutions enable PE firms to:

• Access and consolidate data from various internal and external sources, such as accounting systems, CRM platforms, ERP systems, and third-party data providers
• Create and customise interactive dashboards and reports that provide a holistic and real-time view of the portfolio performance and the market environment
• Share and collaborate on data and insights with different stakeholders, such as investors, management teams, advisors, and regulators
• Enhance data quality, security, and governance, and comply with industry standards and regulations

The Impact of Data Analytics and Reporting on PE Processes

 Data analytics and reporting can have a significant impact on various key processes and functions of PE firms, such as:

• Deal evaluation: Data analytics can help PE firms identify and assess potential investment opportunities, conduct due diligence, and validate their investment thesis. Analytics tools enable private equity professionals to analyze vast amounts of data quickly and make well-informed decisions based on trends, patterns, and historical performance. For example, data analytics can help PE firms understand the target company’s revenue drivers, customer segments, competitive position, growth potential, and risks.
• Financial/KPI/ESG funds monitoring: Data analytics can help PE firms track and measure the financial and operational performance of their portfolio companies and identify underperforming assets and areas for improvement and intervention. Data analytics can also help the firms monitor the key performance indicators (KPIs) and environmental, social, and governance (ESG) metrics of their portfolio companies and evaluate their impact on the value creation and sustainability.
• Investment performance analysis: Data analytics can help PE firms analyse the performance of their individual investments and their portfolio as a whole, and determine the drivers and detractors of value. For example, data analytics can help them calculate and compare the internal rate of return (IRR), multiple of invested capital (MOIC), net asset value (NAV), and other performance metrics of their investments, and attribute them to various factors.
• Fund performance analysis: Data analytics can help PE firms analyse the performance of their funds, and optimise their fund allocation strategy. For example, data analytics can help them assess the risk-adjusted returns, volatility, diversification, and liquidity of their funds, and benchmark them against their peers and the market.
• Risk and compliance analysis: Data analytics can help PE firms identify and mitigate the risks and challenges that may affect their portfolio performance and reputation, and ensure their compliance with the relevant laws and regulations. For example, data analytics can help them monitor the market trends, competitive dynamics, and macroeconomic factors that may influence their portfolio value and exit opportunities.

The Future of Data Analytics and Reporting in PE

Data analytics and reporting are expected to play an even more important and strategic role in the PE industry in the future, as the market becomes more competitive, complex, and dynamic. Some of the emerging trends and opportunities for data analytics and reporting are:

• Leveraging new and alternative third party data sources to gain deeper and richer insights into the portfolio companies and the market.
• Applying more advanced and innovative analytics techniques, such as predictive analytics, prescriptive analytics, and sentiment analysis, to generate more accurate and actionable recommendations and forecasts.
• Adopting more agile and cloud-based solutions for data analytics and reporting, to enable faster and easier data integration, analysis, and visualisation, and to support remote and collaborative work.
• Enhancing data literacy and culture across the PE organisation, to empower and enable the decision makers and the stakeholders to access, understand, and use data and insights effectively and efficiently.

Conclusion

Data analytics and reporting are powerful tools that can help PE firms make better decisions and create more value for their investors and portfolio companies. By using data analytics and reporting, PE firms can improve their deal evaluation, funds monitoring, investment performance analysis, fund performance analysis, and risk and compliance analysis. Data analytics and reporting can also help them gain a competitive edge and a sustainable advantage in the market, which is becoming more challenging and dynamic. The firms that can embrace and leverage data analytics and reporting will be able to achieve higher returns and greater impact in the industry.

Authored by: Ankur Agarwal (Co-founder & CTO, PE Front Office)

Published In: Financial Express