Private Equity Gradually Adopting Alternative Data
Partner content produced in association with Neudata
The delayed adoption of alternative data by private equity firms could be attributed to a less clear return on investment from using alternative data. However in 2019, industry reports showed that 27% of firms currently use alternative data and a further 25% are expected to do so in the near future. AlphaWeek’s Greg Winterton spoke to Ian Webster, Senior Vice President at Neudata, to learn more about this trend.
GW: Ian, private equity budgets are more likely to be allocated to research and consulting services, rather than external data and the internal teams required to create insight from it. For the ones that are doing it, what are the early observations?
IW: PE firms that have integrated alternative data into their processes have lots of room to innovate and prove value. These early adopters report finding deals earlier, with an information advantage over their competitors that allows them to prioritise the best opportunities. They are also able to monitor their universe on key metrics automatically, without endless meetings and pitch decks. Finally, alternative data can bring a whole new lens to diligence, allowing PE firms to validate and verify a target’s performance and to identify risks / opportunities proactively.
GW: A private equity firm’s traditional method for deal sourcing is to build a strong network and ecosystem. How is alternative data changing that?
IW: Alternative data can be employed at the beginning of the deal sourcing process to ensure the PE firm isn’t missing any key names from its universe, by simply identifying companies that fit its criteria. Moreover, many of these sources can then indicate when a company is growing faster (or slower) than its peers. PE firms can then build a series of indicators for their universe of potential targets: these indicators can act as early flags for companies ‘breaking out’ (or conversely not hitting their milestones).
GW: PE firms’ use of alternative data differs from hedge funds. Tell us what Neudata is seeing in terms of how its PE clients are using this.
IW: Unlike hedge fund data users that want recurring annual subscriptions to the datasets they use, PE firms might only need access to the data for a one-off period of weeks or months, often don’t need full data history, and may only be interested in a small number of companies. Historically, PE firms faced stern resistance from data vendors that are used to selling their data on an annual subscription basis, but we are seeing data vendors being increasingly flexible as the market for full subscriptions becomes harder to grow. The annual subscription model issue is a common objection we see from PE buyers but it’s actually not always the case.
Ian Webster is Senior Vice President at Neudata. He will be presenting ‘Neudata Thoughts: Alternative Data for Private Equity Investors at the Neudata Summer Online Summit at 11.45am ET / 4.45pm GMT on Thursday, June 17th. Click here for more information and to register
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