Finding the informational advantage in private equity

Overview

What was previously a nascent area of the private equity market, where technology companies were bootstrapped prior to IPO, the growth equity market has now matured. Concurrently, the availability of alternative data has blurred traditional dividing lines between public and private companies. In this report, we consider opportunities to apply predictive data science to chart a new path in private markets.

Alternative data

Alternative data can offer valuable insights into the growth prospects of individual companies, sectors or themes. Innovative investors are beginning to extend to private markets the same systematic, data-driven processes that have been successful in public markets for decades. Consider the insights available through online job postings data sets alone. This rich data set can reveal many granular details about an industry, a sector or a specific company — providing real-time insights to assess which sectors are positioned for outperformance, which companies are experiencing increases in demand and what opportunities executives are positioning for strategic growth. What’s more, the coverage of private company job posting data is roughly 300 times greater than that of public companies.

Online job posting coverage of public vs. private companies

300x more private than public companies

Growth equity opportunity

Until quite recently, growth equity was a nascent area of the private equity market where technology companies were bootstrapped prior to IPO. Today, the growth equity market has matured to USD$63 billion of deal activity last year, up from USD$25 billion in 2010 (see chart below). In years past, it was exceedingly rare for companies to achieve a USD$1 billion valuation without access to public capital (hence the name “unicorn” to describe the statistical rarity). Today there are close to 500 companies boasting this status, turning their once mythical status into a more common sighting.¹

U.S. private markets growth equity activity

Growth equity market has matured to USD 63 billion of deal activity

Data-driven approach

If growth equity companies are staying private longer, it may be no surprise that private and public company data footprints are increasingly similar. While private companies have the luxury of forgoing the formal data disclosures required of publicly traded companies, digital footprints are not obscured by the difference in capital markets construct.

Reimagined portfolios

The ability to recognize and source new investment opportunities is arguably the most important function of the growth equity investment process. Historically, sourcing the attractive deals has been relationship-based. Today, data science techniques have raised the bar, allowing pioneering managers to look beyond their network and proactively detect attractive company characteristics using predictive models. Systematic models offer scalability, enhanced efficiency and improved portfolio outcomes by evaluating a universe of thousands of securities. A systematic approach offers investors the opportunity to uncover opportunities that traditional methods and models may have overlooked, with a faster view and with a higher degree of certainty.