How Successful Private Equity (PE) Firms Are Using Modern Data and Analytics to Manage Their Portfolios

Private equity (PE) firms are always on the lookout for new investment opportunities, and most have a system in place to help make those decisions. But equally important, is being able to better manage their existing portfolio of companies and maximize their return on investment as quickly and as efficiently as possible.

In this blog, we will discuss how data and analytics can help address the challenges that private equity firms face, and where to start with adopting a modern approach to data and analytics.

How Data and Analytics Help Private Equity Firms Address Challenges

A private equity firm is only as good as the decisions it makes and the opportunities it uncovers—for both itself and the companies it invests in. PE firms need a 360-degree view of their portfolios so that they can make informed decisions across the board.

Making data-driven decisions—based on historical and current information—enables PE firms to understand the full picture of their investments and how to best help each company in their portfolio.

Data and analytics help PE firms:

• Perform due diligence prior to making investments: The use of data and analytics can help identify, evaluate, and quantify how a PE firm determines the value of a new investment. The ability to more accurately collect data and analyze the costs and risks associated with all aspects of the investment can lead to quicker, more informed decisions all around.
• Grow their portfolio companies and increase market share: Most private equity firms have a diverse portfolio and it’s not possible to be an expert in all the different business models. Each company comes with its own business processes and technologies, and sometimes lack the management or resources to fully optimize its business plan. Data and analytics can help uncover new sources of revenue, improve sales, monitor finances, and enable more targeted marketing. The right analytics solutions and platforms can even help to monetize the company’s data. For example, the use of embedded analytics allows a company to provide its customers or members access to its data at a cost. A modern approach to data and analytics helps to focus and prioritize opportunities so that both the company and the PE firm are successful.
• Measure the performance of portfolio companies throughout their lifecycle: A private equity investment is typically 5 to 7 years long. For a PE firm to understand how a company within its portfolio is performing, it needs to monitor financial and operational data. Real-time analytics solutions can automate the manual consolidation and analysis of that data, and the reports can be used to measure portfolio performance, create benchmarks, and unlock new sources of value and revenue.
• Increase the operational efficiency of its portfolio companies: The more efficient the company, the bigger the returns for PE firms. There are many factors that lead to inefficiency—including poor business processes, excessive time spent manually preparing data and reporting, and lack of training for business users. Data and analytics solutions can automate manual data collection and reporting efforts and identify inefficiencies in company processes so they can be remediated.
• Make informed decisions about exit strategies: Divesting a company is not an easy task—in fact, it’s probably the most important decision a PE firm makes as it is what ultimately yields the returns. Analytics solutions help simplify the evaluation process and maximize the potential of a sale by placing all relevant data in a single data repository, focusing on real-time insights, and helping to identify areas that require immediate attention.

Where PE Firms Should Start When Adopting a Modern Approach to Data and Analytics

A modern approach to data and analytics not only enables the private equity firm to get ahead of its challenges, but it can also enable each company within its portfolio to do the same. Moving away from outdated, legacy solutions and modernizing the collection, analysis, use, and sharing of data is critical in a fast-moving, quickly changing business landscape. Here are five areas PE firms should focus on when adopting a modern approach to data and analytics:

• Data strategy is the first, and most critical step in a data and analytics initiative—especially after you have made a new investment. A data strategy is the foundation of everything else going forward and will guide both your firm and company from a people, process, technology, and data perspective. It addresses questions such as:
  • What do employees at your firm, as well as your portfolio of companies need in order to use data more effectively?
  • What processes are required to ensure portfolio data is high quality and accessible?
  • What technology will enable the storage, sharing, and analysis of portfolio data?
  • What data is needed for effective portfolio analysis? Where is it sourced? And is it of good quality?

What should your data strategy include?

• Modern data architecture—you need a modern data stack that supports large data volumes, diverse types of data, and enables diverse types of analytical workloads and allows for elevated levels of governance. There isn’t a one-size-fits-all for a modern architecture; each company will have its own unique approach—which is highly critical to understand for not just your firm, but for your portfolio of companies too.

How do I build a modern data architecture to overcome modern data problems?

• Data management and governance are paramount for both your firm as well as the companies within your portfolio. To be useful, data needs to be accurate and available to the right people at the right time. Data management can help ensure you can solve data problems of today, as well as the unknown problems of the future. And data governance—when done right—can garner better user adoption and lead to better decision-making across the organization.

• Modern analytics tool— you need a modern, next gen enterprise BI tool that offers capabilities such as real-time analysis, embedded analytics, enhanced collaboration, and more. There are a lot of analytics tools on the market, so when you’re selecting one, make sure you pick a tool that fits into your data architecture. So, if you’re building your modern data stack on a cloud platform like Azure, AWS, GCP, or Snowflake, then you should consider how each analytics tool (Power BI, Qlik, Looker, Tableau) fits into these respective architectures. We suggest approaching picking an analytics tool like you’re purchasing a car; pick a few, take them for a test drive, and see which one best fits with your architecture and your business needs. Ultimately, picking the right tool can help you realize the potential and value of your data.
• The right people and processes are equally as important as the technology aspect of modernization. Working with each company within its portfolio to understand where training is required and what processes need to be improved will ultimately lead to greater return on investment, as well as positioning the company for continued success.

Each company within a PE firm’s portfolio will have different business problems, as well as different circumstances surrounding them. A modern approach to data and analytics provides the lens needed to address challenges and to remain competitive and profitable not only now, but in the future as well.