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Four areas where PE firms and portfolio companies struggle with data
05 March, 2021
In the private equity (PE) world, success depends on speed and data. From making decisions about which firms to acquire, to helping those companies perform better, to taking them public, you’re only as good as the decisions you can make quickly based on quality data. But PE firms and their portfolio companies are struggling. The exchange of information between them — gathering, inputting and sharing data — can take months. And that’s just too long.
Think about what goes on in a typical portfolio company. Staff at portfolio companies are working with data sources from point of sale transactions, customer relationship management tools, web analytics and more. The company typically doesn’t share access to these systems with the PE firm, and if the firm does receive the resulting data, the transfer is done manually upon request, at a much later date, and can often be incomplete.
In addition to getting their arms around the data they have, PE firms typically struggle in four key areas: monitoring portfolio companies, screening for the next buy target, creating value and managing company exits. But there’s a better way. Automation can help in all of these areas and, by helping you to identify better insights more quickly, can give your firm a competitive advantage.
Firms and portfolio companies struggle getting data into a central repository
Until you can consistently map information from existing systems to get everything into a central data repository, you may not even know what you have. We’ve seen firms fail to understand how many systems need to be tapped to gather the relevant information, let alone obtain the data that sits within those systems. This can slow decision making and value creation. Common relevant data types include: financial, sales and marketing, supply chain, human capital, technology and more.
PE firms struggle in four key areas beyond getting the data in one spot
1. Monitoring your portfolio companies
In the day-to-day management of their portfolio companies, PE firms may not be able to take their decision making to the next level without real-time quality data. But incredibly, in many cases, data is still gathered by portfolio companies and PE funds the old-fashioned way: cell by cell, spreadsheet after spreadsheet. It’s no wonder that — by the time your firm conducts critical analysis to monitor company operations — data is “aged.” Or worse still, due to inputting errors, it can lack integrity. Many reporting processes get bogged down by tangled reporting or a lack of transparency, including:
- Financial performance dashboards, EBITDA and KPIs
- Analysis and analytics on portfolio company business drivers
- Financial statement or tax automation
- Environment, sustainability and governance (ESG) reporting
2. Screening for better targets to buy
Without easy access to internal benchmarks and other data from its portfolio companies, PE funds can find the quality of their screening process for potential targets lacking. For many firms that hold information about several companies in industries they are interested in, performance information should be right at their fingertips. Problem is, many PE firms just don’t have a process in place to analyze timely internal data on the industry.
We forecast even more acceleration in M&A activity throughout 2021. To take advantage of an aggressive market, you should prepare to move quickly and with good information. Without both of those, you risk leaving money on the table...
- In deal origination, when the investment bank can be a competitor rather than a cohort. Without fast, accurate data, your firm can lag well-sourced competitors.
- In implementing positive growth strategies, capital needs to be distributed wisely to handle a large number of opportunities. From both the PE side and potential acquisition target, we see potential here for more significant investment.
- In enhancing portfolio oversight, because the sheer volume of information can quickly become an unwieldy reality.
- In determining the value proposition, when the data a selling company has to offer can be a significant benefit. You may just find your edge in the market.
As a firm collects data over time, PE firms can use the same systems they use to screen for target identification and benchmarking. However, developing that process takes more than basic financial data and can include resources from third-parties. But, if managed correctly, this type of system has the potential to boost the identification process as well.
3. Creating value
When seeking to reorganize portfolio companies as part of a value creation plan, PE firms look to improve profitability as quickly as possible. But where to begin? Where is the data coming from? In many cases, you may have the data you need, but can’t quickly derive insights from it. That’s a big problem because you need data-driven analytics to help you prioritize opportunities and create value.
Further, we have seen firms struggle to keep their company to the goals set across in the initial deal thesis once they transition from the deal team to operations. Part of that struggle comes from the lack of an integrated view on their portfolio company’s progress over time. Firms can’t track what the data and analytics won't let them, and this can lead to missing a critical juncture in the value creation process.
We’ve also seen excessive overhead and compartmentalized functions clog access to the same data. And when we talk to people in the industry, PE firms often tell us that there’s no straightforward solution without expensive system overhauls. Executives are often also frustrated that standard solutions normally take months, or even years, to design and implement.
4. Managing company exits
When thinking about an exit strategy, PE firms and portfolio companies would like access to real-time data to restructure, perform valuations and meet regulatory demands for public disclosures. But getting the systems in place to support that effort often leads to massive costs for portfolio companies and slows down their ability to go public. The solution is often a decision to invest in an enterprise resource planning (ERP) system. Although necessary, that can take a year to implement and is costly.
There’s a better way
While all of this may seem overwhelming, there is a way to prioritize and get started. Here’s what we recommend:
- Embrace data wrangling and start collecting data from everywhere. Look for information across all functions and all portfolio assets and begin creating a central data repository like a cloud-based data lake.
- Focus on companies that best need real-time insights to improve their value proposition. For example, a portfolio company designed to meet ESG standards requires large amounts of access to data. And having a company-broadview is pretty neat, too.
- Implement tools to help transition from pre-deal to post-deal. Using monitoring tools and sophisticated value analytics can be key to not letting execution of the initial deal thesis slip away.
- Rethink the pre-IPO process. Give your firm the consolidation and streamlining tools that can help it make that mission-critical data immediately available.
- Target projects where you can dramatically reduce cost and time. Make cost-cutting decisions without having to invest in a brand-new IT stack. Start where you can get your biggest bang for your buck.
- Enhance timely and accurate financials and tax filings. By automating your financial data feeding reporting processes, you can help ensure accuracy, improve speed and reduce costs. Enhanced investor reporting means maintaining easier channels for portfolio management to communicate regularly with investors.
Through automated data services, your PE firm can get a firm grasp on prioritizing what should come next. You can have an enhanced ability to address capital deployment, better valuation projections and better information. Simultaneously, portfolio companies can focus on operational improvements including both individual and cross-company initiatives.
Consider the data management services that are available to you today. Imagine having nine months’ worth of data, compressed and offered in nine weeks or less. Now imagine a seamless connection of all data sets within your firm, available at your fingertips — from deal sourcing to exit. It’s time to get to the other side.
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