Finance

Part 1: Private Equity Firms Maximize Portfolio Value Without Hiring More Analysts

author Josh Miramant December 17, 2019

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.

  • 1) Optimize your deal sourcing with data
  • 2) Improve portfolio company operational efficiency

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.

PE Leverage Point: Improve Deal Sourcing

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.

  • Gather Non-Financial Data. Most private equity transactions involve private companies where there is limited public financial data. At the deal sourcing stage, you need other data points to identify promising data. Use data analytics to identify deals based on non-financial data points such as growth and engagement trends in web traffic and social media. While Internet engagement does not equate to revenue, rapid growth in these metrics suggests that a company is successfully attracting attention.
  • Enable Peer Analysis. When you look at three different companies in the cybersecurity software field, how do you evaluate them? Use data analytics to review how end customers are discussing these products (e.g., using sentiment analysis). Further in the deal process, you can use analytics to compare business model differences (e.g. pricing, customer lifetime value, and expenses).
  • Refine Investment Models. Modeling future investment returns in private equity is nothing new. Data analytics has a role to play in helping you to improve the reliability of those projections. For instance, a portfolio company projects 50% year over year revenue growth. How do you know if that is a credible forecast? Use data analytics to conduct a bottom-up financial forecast. If the company relies heavily on digital marketing methods to acquire leads and customers, it will be even easier to develop these models.

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

PE Leverage Point: Improve Portfolio Company Efficiency

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:

  • Quality Improvement. When a company receives a large number of customer support tickets, complaints, and other input, it is tough to know what to improve first. Use analytics to summarize and clarify the best ways to address customer needs. As a result, the company will retain more customers by improving product quality.
  • Sales and Marketing Analytics. Use analytics methods to drive down the cost of acquiring new customers. What if the company does not yet have a repeatable process to acquire customers. Data analytics can help you design and measure different tactics until you find an approach that resonates with your customers.

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.


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