[ D E PA R T M E N T
A very brief history of big data in private equity
Big data promoters in private equity see the technology as an
enabler to acquire more knowledge and help firms make better
investments. Equally, it can be put to good use in the middle and
back office, and if properly aggregated can help firms with their
risk management and client/regulatory reporting. The problem
with big data, as the name implies, is that there is a lot of it, and
far too much of the stuff for fund managers and their service
providers to handle, at least with their existing technology and
systems.
In came artificial intelligence (AI), a disruptor with the com-
putational power to analyse vast tranches of big data, and deci-
pher it, providing useful analytics to companies, allowing them
“I have heard of some of the larger private
equity groups hiring big data officers who are
conducting in-depth assessments into the
data strategies of their underlying portfolio
companies during the investment due
diligence process, alongside analysts.”
MARC DE KLOE, ADAMAS ASSET MANAGEMENT.
to get ahead of their competition. “Big data is on the horizon in
private equity and real estate, and could bring some fundamental
changes to the industry. The asset class is, however, still evolving
in terms of big data adoption,” said Joe Patellero, managing
director and head, SS&C Global Private Equity Services.
The practical benefits of big data in private equity
Identifying good deals in private equity is a slow burn exercise,
and an increasingly difficult one with the asset class looking
after more money than ever before, and under pressure from
LPs to make investments, even if it means they pay too much for
distinctly average companies. Executing a private equity deal is
therefore an intense process and usually requires analysts to go
through large quantities of documents about target companies.
If the fundamentals behind the company are solid, due dili-
gence is conducted and the investment process will begin. Big
data analytics is unlikely to replace the conventional approach
towards deal-sourcing, but it will be a useful add-on. AI-ena-
bled big data analytics could be programmed to peruse through
meaty documents, alerting due diligence teams to glaring red
flags or anomalies at a speed and accuracy-level far superior
to any human. Big data and AI could therefore bring huge cost
savings to private equity.
“Anecdotally, I have heard of some of the larger private equity
groups hiring big data officers who are conducting in-depth
assessments into the data strategies of their underlying portfolio
companies during the investment due diligence process, along-
side analysts,” commented Marc de Kloe, COO at Adamas Asset
Management, a private credit manager in Hong Kong.
With fees in the industry being picked apart by regulators in
the US and UK as well as clients, such cost benefits should be
welcomed. Nonetheless, the early stage integration and imple-
mentation costs of big data systems and AI will be steep, making
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H E D ]
it available to only the largest of private
equity managers. Most firms – rather than
laden themselves with large operation-
al costs – will probably wait until the
technology becomes more commoditised
and acquires a better track record before
building it into their infrastructure.
Beware of data
Given the vast quantities of data circulat-
ing online today, it should not come as a
shock that a lot of its contents are woe-
fully inaccurate, incomplete or downright
deceptive. “Fake News’ – first coined in
mid-2016 by Buzzfeed journalists after
they identified a litany of spurious news
reports emanating from Macedonia em-
blazoned with ludicrous headlines such
as “Pope Francis Shocks World, Endorses
Donald Trump for President,” is now a
growing challenge in big data circles.
AI admittedly can identify oddball
results or trends, but the quality of the
analysis it produces is directly correlated
to the quality of the data it is processing.
Inputting inaccurate or corrupted data
into AI software will invariably generate
misleading results. Private equity man-
agers therefore need to ensure they have
checks and controls over how they source
their data and that they verify it comes
from accredited originators as opposed
to purveyors of fake news, for example.
Only then should they make investment
decisions off it.
With all eyes on the behaviour of digital
giants such as Facebook following alle-
gations of inappropriate use of consumer
data and the introduction of the EU Gen-
eral Data Protection Regulation (GDPR),
private equity firms must ensure that any
information they receive has been done
“Big data is on the horizon in private equity
and real estate, and could bring some
fundamental changes to the industry.”
JOE PATELLERO, SS&C GLOBAL PRIVATE EQUITY SERVICES.
so legally. GDPR violations can incur
fines of up to 4% of annual turnover or
20 million euros, or whichever is greater.
If managers are acquiring information
that they use to make investments from
unscrupulous sources, the penalties could
be severe.
Private Equity Issue 2018
globalcustodian.com
29