Data Struggles of PE firms and Portfolio Companies: A Review

Apr 22, 2021 | Article

In the world of Private Equity (PE), success and satisfaction depend on data and speed. On a day-to-day basis, managers have to make decisions about the firms, which should be acquired. Thus, enabling the acquired company to perform better and becoming an important conduit to take the company public. It is important to note that the decisions made by these professionals can only be as good and sharp as the quality of data it is based on. However, the PE companies and the portfolio companies are under a constant struggle. The employees of portfolio companies work with data from web analytics, sale transactions, Customer Relationship Management (CRM) tools, and more. The company, in most cases, does not share access to all of these data with the PE firm. When PE firms don’t get the resulting data, the transfer is manually performed upon request. This manual job takes a lot of time and is, in most cases, incomplete.

Typically, the information exchange between them – gathering of data, entering of the collected data, and sharing the data at the right platform – can take months. This results in a lot of delay in decision making, and it is where the importance of data and speed props up in private equity.

The Four Areas of the Struggle for Private Equity Firms:

1. Monitoring the portfolio firms

In the daily management of the portfolio firms, PE companies may be unable to take decision-making to the next step, which could be due to the unavailability of quality data (in real-time). But it is essential to note that the portfolio firms and PE funds still collect data in an olden way in several cases. That means cell after cell, spreadsheet by spreadsheet. Thus, it comes with no surprise that by the time the firm conducts critical analysis to monitor the company's operations, the data becomes obsolete. In worst case, it may lack the integrity due to the input error. As a result, several means of reporting get negatively impacted. These include:

  • FBITDA and KPIs, financial performance platforms
  • Analytics and analysis on business drivers of portfolio company
  • Tax automation, Statement of finances
  • ESG (Environment, sustainability and governance) reporting

2. Screening with the objective to buy better targets

Due to the defects in internal benchmarks, and a lack of proper access to information and other data from the portfolio companies, PE firms often discover that the screening process lacks complete information. For several firms, this results in not having a readily available data. The cause of error in this process is that PE firms don’t have a robust method for acquiring internal data for analysis.

The best process to benefit from an aggressive market is that the individual should prepare to move forward with good information speedily. Without this, there are always the chances of incurring a heavy loss. The right data can help:

In origination of the deal: When investment bank is acting as a competitor instead of being a cohort. Without accurate data, fast process, the company can be delayed in reaching out to well-sourced competitors.

In the implementation of positive growth strategies: In this case, the capital needs can be wisely distributed in order to handle a considerable number of opportunities. This is beneficial for both the PE side and also targeted potential acquisitions. In this case, one can check the potential for higher monetary investments.

In the enhancement of oversight: In this case, the big volume of information can speedily turn to become a reality in the enhancement of portfolio oversight.

In the determination of value proposition: In this case, the data present with the selling firm has to offer a great value and benefit. This way, the investor can find her edge in the market.

3. Value creation

When having the objective to reorganize the portfolio firms as an essential part of the value creation plan, PE companies look to improve profitability at the earliest. However, it is not still clear to them that where to begin with it. From where the data should be collected from. In several cases, it so happens that there is the availability of data, but it is not easy to draw insights using it. This is a real difficulty since insights are required to perform data-driven analytics for the purpose of prioritization of opportunities as well as for value creation.

In addition to this, companies struggle a lot to communicate their acquisition goals across in the initial part of the deal. A good part of this struggle arises due to the lack of integrated details of their portfolio firms’ progress over a period. Firms cannot keep a record of what the analytics and data don’t allow them to track. This can result in missing a crucial data point in creating value.

4. Managing exits of the company

When exit strategy is considered, portfolio companies and PE firms prefer to access the real-time data to perform valuations, restructure, and meet regulatory demands for disclosure to the public. However, creating the right systems at this spot to support this effort often results in huge monetary loss for portfolio companies, which further lowers the speed of their plans to go public. The solution to this problem is often the decision to invest in a better ERP (Enterprise Resource Planning) system. Though this is essential, it can take a period of a year to implement and it also proves costly.

Final thoughts

Through data services automation, the PE firms can improve their ability to deal with better information, capital deployment, and better valuation projections. In addition to this, the portfolio companies can focus on operational enhancements, including cross-company and individual initiatives. Become data ready to bust the four biggest struggles in private equity.

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