Fleur Hicks, CEO of onefourzero, explores the renewed importance of using data to make informed decisions on private equity investments.
Investing in the process of accurate commercial forecasting has never been more critical, and the stakes couldn’t be higher. The economic and geopolitical headwinds that dominated the second half of 2022 have resulted in a more opaque view of the mid-term, in cases weaker valuations, and certainly more caution. This means that, in turn, many sellers have decided to hold fire until conditions improve – namely pricing agreements.
But those aren’t the only problems private equity is facing. It recently came to light that private equity returns are a major threat to pension plans’ ability to pay retirees this year. In recent years, alternative investments, such as private equity, have played a vital role in shoring up pension funds. Between 2000 and 2020, private equity outperformed the S&P 500, the Russell 2000 and venture capital. But as economic conditions deteriorate, so do private equity returns. So the question is, (how) can investors increase the likelihood of higher returns on future deals?
Our answer: Data. Many assume that a data-led approach to diligence is a consumer play. But this is not the case at all. This view likely stems from the belief that digitised data pertains to digital assets or eCommerce, whereas actually, it is merely the method in which the data is captured. As such data-led diligence can be seamlessly applied across all sectors and across the whole M&A lifecycle. Moreover, because these comparative data sets can deliver reasonable KPIs ranges and a wider view of market dynamics, early access to these data sets can play a vital role to play in creating value and, by extension, producing returns.
Data also plays a pivotal role pre-approach. Live data monitoring is essential for firms seeking bolt-ons or for sector/territory expansion. Up-to-the-minute data monitoring tools use alternative data to give them a general overview of a sector and its key players. For sellers, these tools enable them to determine asset value, identify areas for improvement and benchmark progress.
Now isn’t the time for private equity deals to slow down. With the economic stakes so high, private equity firms simply cannot afford not to leverage data to inform decision-making on future investments.
