Natalie Cramp, Partner at commercial data solutions provider JMAN Group, explains how data is transforming decision-making and playing a critical role in private equity investments.
Recent economic conditions have caused a sea change in private equity (PE). With increased interest rates driving M&A volumes down, the days of multiple arbitrage over, and competition for desirable potential investment opportunities intensified, it has become riskier for PE sponsors to depend solely on traditional methods to optimise their respective portfolios. Further, the speed of change that the latest AI developments are causing in markets is creating a far greater likelihood that a good investment could turn bad during a holding period.
Investment Committees are acutely aware of this and are demanding an even greater level of granularity before backing investment theses that might previously have been considered safe bets. As a result, it’s become increasingly important that managers can support their investment strategy with detailed insights and analytics. Here, the remit is to improve the robustness of their due diligence and enhance the equity narrative by prioritising and quantifying value creation and return opportunities.
So, you may ask – what does this mean for business leaders? Now, more than ever, for any company seeking to maximise its appeal amongst investment players it is imperative to adopt a data-centric approach.
Previously, most businesses, especially startups, could have relied on just the data basics. This is because historically investors have wanted visibility into just the core financial trends such as profits and turnover. Not anymore. Now investors have much higher data expectations for transactions and are much more interested in understanding the ‘how and why’ certain financial and operational trends are occurring.
This shifting buyer behaviour is creating a growing expectation for businesses and the management teams that serve them to be able to provide broader and deeper datasets. The goal here is to be able to provide the data and analytics needed to support their ‘equity story’ to give investors comfort on past performance and future returns. In this way, it’s not enough to just say they have grown profitably by X% year on year – it needs to be evidenced by granular data and solid analytics. With higher expectations because of the common availability of tools and processes, the risk is if companies don’t do this they will not achieve the best valuation they could.
Data-based decision making
Of course, this may mean extra investment and resources in the data infrastructure and expertise needed to account for this new age of datafication, especially for those businesses who may have, until now, adopted a rudimentary approach to their data and the analytics of that data. However, the good news is that it can pay dividends in the long run through the company’s ability to inform better day-to-day decision-making and identify investment opportunities that traditional approaches might overlook. CEO’s who are meeting themselves coming back will find that the right data goes a long way to helping you with where to spend your time, and where to place your bets. Indeed, according to the McKinsey Global Institute, data-driven companies are 23 times more likely to top their competitors in customer acquisition, and about 19 times more likely to stay profitable.
Using data coupled with AI to make incremental improvements to traditional value creation levers, enables rapid revenue increases and enhances EBITDA. Understanding the core value creation plan and augmenting the key initiatives with AI can add tremendous value at pace. Simple things like using data and AI to better understand and target customers, be effective in pricing methods, accelerate product development, and drive operational efficiencies are use cases that can be executed without causing too much disruption. For businesses starting on their data and AI journey, this route can be the most effective in generating a rapid return on investment and building cultural momentum to enable a more data-driven organisation.
When the numbers add up
There is no doubt that a data-driven culture and the ability to make faster, more informed decisions have become a key requisite for investment players.
As we move towards a future increasingly shaped by data, and the speed of change brought by the latest AI developments, companies must adopt a holistic approach to their data that offers new perspectives for investors and enhances their ability to anticipate market trends. As part of this, continuous learning should remain a priority to keep teams at the forefront of advancements, how to translate them into business value and navigate risk.
