AI In The Shipping Industry
Artificial Intelligence has been re-shaping the world as we know it. Not in the way that we saw in the...
In private equity, you’re playing a high risk and high reward game. Investors expect significant returns compared to the public markets. As a result, private equity specialists need every advantage. Simply hiring another quantitative investment analyst is not enough. Every PE firm is already doing that. Instead, you need new techniques to increase the value of your portfolio companies.
Leverage Points To Boost Private Equity Investments
Private equity is slow at adopting new technology. According to a report from the Wharton School:
“when it comes to the world of private equity it’s a different story, according to Sajjad Jaffer, co-founder of the advisory and investment firm Two Six Capital. He said that when he and Ian Picache started their analytics-based firm in 2013, there had been “no technological innovation in private equity since the invention of the Excel spreadsheet.”
In private equity, you influence the success and failure of your investments. Unlike investors in the public markets, you may have board seats and the ability to influence management decisions. At the same time, you also need to be thoughtful in how you exercise that influence. If you meddle too much, you may frustrate your portfolio company CEOs and lose credibility in the marketplace.
The solution to this tension? Focus on a few leverage points where your expert judgment will produce the best results. Aside from those cases, step back and let your companies operate.
The first technique improves your returns by reducing the likelihood of investment mistakes. The second technique helps you to increase returns by improving operational performance. Let’s take a closer look at how Blue Orange makes both of these wins possible.
In private equity, you face a difficult task to find attractive investment deals. First, you have to find companies that fit your financial criteria in terms of profitability, growth, and related criteria. Second, you need to find “blue ocean” investment opportunities where you are not competing with other investors. When you pursue hot companies with many other investors, the investment price you have to pay tends to go up, and that makes it harder to achieve significant returns. In contrast, sourcing a deal where you are the only investor at the table means you will have improved flexibility.
To take advantage of this leverage point, you will need to adjust your methodology to consider new and unusual investment opportunities. Once you have made an investment decision, some investors take a step back. That hands-off approach is no longer good enough
When you invest in middle-market companies, they are unlikely to have sophisticated analytics departments. They might have an analyst who works with marketing data and one that works on financial analysis. However, such relatively immature analytics functions tend to be backward-looking. Reporting on past events is necessary, but it is not enough.
As an investor, you can supplement the analytics capability of portfolio companies. Specifically, we suggest helping companies address problems such as:
To deliver those capabilities, you don’t need to build your internal analytics and consulting department. Instead, leverage Blue Orange Digital. We can step in and help your portfolio companies to optimize their operations.