This story was sponsored by Backstop Solutions
It is natural for data to feel like a problem to solve. There is so much information coursing through the various systems at any firm that GPs are spending real time and money for technologies to merely manage the basics of due diligence, portfolio analysis and reporting.
But Backstop Solutions’ Chris Anderson and Adam Pinkert argue that an optimised data strategy can go well beyond that and upgrade the entire investment operation. As this current boom gets older by the day, it might be more important than ever to look at systemic improvements.
Data strategy is a nebulous term, so what exactly do you mean when you talk about its potential for private funds managers?
Adam Pinkert: Data is all the knowable information at the firm. This includes more than just financial statements, but all the information that drives decisions and explains to investors and other stakeholders why those decisions were made. And by strategy, we mean the three key actions that every firm takes with their data.
First the data is collected, then it is manipulated for both internal and external audiences. Finally, it is delivered to those audiences. An optimised strategy is essentially the best way to do all three tasks.
What is the best way to gather that data? How should they manipulate it for multiple audiences? And then in what format should they deliver it, so it is most effectively consumed? Is it drag and drop reporting? Is it visualisations to make trends apparent? Is it being able to activate alerts for unexpected data? These are the questions that the best data strategy answers.
What can this optimised data strategy deliver to firms? Why should they invest the time and money into upgrading their own?
AP: For one, institutional investors like CalPERS are now getting their own data systems in place. They have the appetite to consume this data themselves, essentially executing their own data strategy and will look for GPs to provide them what they need for their own internal and external reporting. There is a consumption demand.
Two, when macroeconomic conditions are benign, growth is easy, but when that changes, LPs will be looking for the data to explain any losses. If some deals went south, there is data that makes those decisions defensible, and it can help the manager make better decisions going forward.
Even if it is smooth sailing, accessible and well-structured data can improve decision-making throughout the firm. The manager can find trends that might have been hidden within their own operations. They can look at their previous investments closely enough to find out what is making a difference in their performance.
What is contributing to their successes, or those transactions that underperformed? Is it the amount of leverage they are using? Is it their entry multiple, or their operating partners, or the deal source? It allows the manager to mine the data and find where they are creating value, irrespective of the macroeconomic conditions.
Doesn’t that require an enormous amount of data be uploaded into a single system, that remains accessible in a way that a manager can conduct that kind of analysis?
Chris Anderson: That is the challenge for service providers like us. How can we offer a solution that intuitively brings that data to the forefront, either with notifications, triggers or alerts so the data comes to the manager rather than forcing the manager to go looking for it?
AP: We aim for data systems that are easy to use, accessible and informed. This means that information can be easily inputted and stays agile as the business grows, so it never becomes an administrative burden. And then it can be efficiently downloaded and shared with multiple constituents.
But the data should also be arranged in such a way as to be informative. The manager needs to be able to model their universe, so they can see current portfolio companies, target companies and have key data points available, whether they are meeting with a potential lender or investor. If they are able to cite certain specific stats, they might shave a few points off the financing package or help convince a new LP to come on board.
This is not just about automation, or simply reducing headcount because there is less work to be done.
If data administration is not a burden, does that mean the firm frees up time to think about how to use the information more creatively?
CA: Exactly. Staff can then focus on leveraging that data to develop new ideas, and new profit streams. PE firms are very concerned about acquiring and retaining talent, and they need to create a space for their employees to use their full range of capabilities.
AP: Human capital management is a soft science, but it is hyper competitive to get great talent in private equity. Having the next generation wasting time on aggregating data leads to burnout. It’s not what they signed up for, and it does not leverage their true value, which is to go out and find new ways to grow the business.
So, what is the first step a manager can take to improve their data strategy?
AP: A good starting point is to recognise where the data sits today. Do they have a third-party administrator doing partnership and portfolio accounting? If so, how accessible is it? Is it a phone call away with a 24-hour turnaround, or does the admin take the data and deliver it to an internal system that the manager can then manipulate? If so, can they consolidate that data concerning portfolio companies, target companies, lenders, vendors and investors and merge that into a single system to answer questions? That is the goal.
To some GPs, that sounds like a Holy Grail of sorts. What is preventing more managers from having that kind of system?
CA: When these firms think about data strategy, they are not thinking holistically. Deal software gets bought by the deal team, the IR team buys a portal for the LPs, and the third-party administrator may use their own system for fund accounting. But how easily do they communicate with one another? They may not ask how a new technology feeds into the systems already in place.
Perhaps previously they have been fine using Excel and adding a few software solutions along the way, but nowadays there is a real cost to not having a data strategy. If staff spend hours to find a data point, they do not have the chance to be creative with what they find. They may make a poor decision without realising that insufficient data was a root cause. Even worse, they will not have the data they need to see what they are doing well, or why something underperformed.
But with a robust and disciplined data strategy, they can course correct quickly. It is not just a data strategy, it is a strategy for understanding what exactly the firm is doing, and how to do it better. Everyone may say they use data-driven insights today, but in the long run, the quality of the data, and the quality of the insights, will show up in that fund’s IRR.