Private equity investing has been a big part of the business and finance landscape for nearly a century. This field of raising capital has always had its guidelines and standard practices, which are still there today. However, just like everything else, as times change, private equity has to change with them. Thus, some transformations, major or minor, are always occurring within the industry, and new trends are always just around the corner. In this century, data has been the main driving force behind changes in private equity. Therefore, let us look at the most important private equity trends that are in one way or another connected to data.
Adapting to the age of data
Investing has always been at the core of modern capitalism. Throughout its long and colorful history, investing has been changing correspondingly with the various changes in our way of life. And the latest of truly major transformations in our lives is that now we use and produce more data than ever before.
Private equity itself has come along as a kind of innovation that changed the way we understand investing. After World War II, the emerging strategies of raising private capital to fund new or transforming businesses have fuelled the building the framework of the business environment that in many ways still persists today.
This has been achieved by the growth of venture capital, providing new entrepreneurs and new ideas a means to an end as well as leveraged buyouts which gave new lives to underperforming businesses.
However, back then, in the second half of the previous century, private equity investors have been working on a relatively small amount of data to inform their decisions and find opportunities. And back then, it was enough, as private equity itself was still developing and finding its course.
But in the age of data, the fully formed traditional private equity is adapting once again. Today PE firms choose from a larger number of investment options and are in need of tracking more information faster. This leads to the necessity of implementing various data-related solutions.
Four private equity trends to look out for
As data is everywhere nowadays, it has an effect on many trends in investing. Here are the ones that will continue to dominate private equity in the foreseeable future.
1) Machine learning. The ability of algorithms to get better at solving problems by simply doing it without additional interference by humans comes very much in handy for PE firms. Algorithms can keep improving at recognizing investment opportunities and making market predictions which, naturally, allows investors to keep improving their returns. Of course, machine learning requires data and a lot of it, as the more data is used to train algorithms, the faster you can get them to adequately complete the tasks you are using them for.
2) Automation of the procedures. PE firms, as many others, are embracing automation more and more in handling their daily workflow. Naturally, it increases efficiency, as AI tools are better at handling large amounts of data that need to be transformed and transferred from one format to another each day. Additionally, automated tools are now even tested at handling some of the managerial procedures to ensure the most efficient usage of the employees’ time.
3) Utilizing alternative data sources. Another important feature of the way private equity firms utilize data today is being on the constant lookout for new data sources. Alternative data has been proven to be as important to the investors, if not more, than traditional financial data. Various firmographics and public sentiment data can not only reveal more about the potential of particular companies but reveal it much sooner than any press releases would be able to do.
4) Data–driven recruitment. Private equity firms also need to ensure that all positions are filled with suitable recruits as fast as possible to ensure the uninterrupted handling of workflow. Data-driven recruitment permits this best practice, as algorithms are able to screen more candidates in less time. Furthermore, analysis of empirical information about the candidates allows to avoid bias and choose the best candidates for the position before final approval by HR.
Private equity in the aftermath of a crisis
As we are slowly heading towards the end of the Covid-19 pandemic, private equity firms find themselves in their natural habitat. Handling the aftermath of big calamities, like international conflicts or global disasters, is something that PE firms have always been doing by providing the needed investments to the new or underperforming companies.
Now private capital will be doing the same. The only difference is that now we have more tools than ever before to analyze the impact of the calamity on the market. Private equity firms will now be looking at a lot of data to decide on how to move forward in the world after Covid-19.
The data is needed first to understand the world we are left with and then find ways to improve it by making good investment decisions.
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