Data Analytics to Power Decision Making and Portfolio Construction
December 6, 2017
December 6, 2017
Data Analytics at SuperReturn
This year’s SuperReturn U.S. conference in Boston delivered another impressive lineup of panels and speakers covering everything from the impact of the geopolitical landscape on investment opportunities to trends in distressed, fundraising and secondaries, as well as a State of the Union-type discussion on the macro global market. One theme that emerged throughout the event, and one that continues to headline countless meetings among GPs and LPs, is the evolution of data analytics that has accompanied the growth and diversification of the private markets.
Data Analytics Workshop
Bison, a provider of software, data and analytics on the private markets, hosted a workshop at SuperReturn that covered a series of topics around the evolution of data analytics. As part of this program, I was invited to give the LP Keynote speech on the ways LPs can use data to power thoughtful portfolio construction and investment selection. Quality data and thoughtful analytics can also lead to better investment decisions in the private markets. This is true both in formulating portfolio construction and in selecting the top managers. As an asset class, the private markets have historically tolerated low-quality data and rudimentary portfolio analysis. This is changing as the development of the asset class requires it. We have long appreciated strategic analytics at Hamilton Lane, where our dedicated research function focuses on portfolio construction, risk and harnessing massive amounts of data.
A panel of Investor Relations professionals shared how an increased focus on analytics has changed the way funds are raised and how GPs communicate with their clients. The last 20 years have seen a greater degree of segmentation in the market in which LPs have shown a preference for specialist funds over generalists. LPs are now asking more probing and detailed questions on portfolio return drivers. GPs are meeting LP demands to articulate the source of their returns and how that meshes with their value creation thesis. This, in turn, has led many GPs to increase both human and technology resources dedicated to quantitative portfolio analysis. Often, this expertise resides within the IR function of a GP.
A panel of LPs rounded out the afternoon by elaborating on the state of private markets data and analytics. Benchmarking in the private markets generally remains an ambiguous exercise. Most LPs benchmark private equity portfolios against a public market index plus a premium, but there is little consensus as to which index is or should be considered the standard or how big of a premium will be used. GP deal teams still underwrite to an absolute return, which may lead to inconsistency with LP benchmarks. Historically, LPs have been too accommodating to re-invest in a new fund raised by their existing GP relationships, but rigorous quantitative analysis can help to keep LPs more diligent and consistent in their investment approach. While we can all agree that private markets data sources have improved, we also recognize that thinly slicing the data by sub-strategy and vintage year can reveal weaknesses.
As the private markets continue to grow and become more diverse, GPs and LPs will demand that the data and analytics at their disposal evolve. This is no different from trends we have seen in other investment disciplines or in other industries for that matter. The data revolution isn’t just coming, it’s here. Are you ready?