Riding the Data “Tsunami”
Data and Excellence in PE Investing
David Snow, Privcap:
Today, we're joined by Thomas Franco of Clayton, Dubilier and Rice; Jay Koh of Siguler Guff; and Eduard Lemle of AlpInvest Partners. Gentlemen, welcome to Privcap. Thanks for being here.
Eduard Lemle, AlpInvest Partners:
Thanks for having us.
Jay Koh, Siguler Guff & Co.:
Thank you.
Snow:We're talking about data in private equity. Historically, there has been lots of data in private equity, it's just hard for people to get to, to analyze and to use. Hopefully, that is changing. I'm going to hear from all of you—you're involved in the flow of dataand you use data to your advantage, so I'm fascinated to hear what you have to say. Let's start by setting the scene for how private equity is different from other asset classes. Some people have called it avelvet box that resides in an otherwise very robust set of analytics that are available to people who invest in other kinds of assets, like public equities. Then, there is public equity, which has defied proper sharing of data andanalytics. Let’s start with a question for you, Jay. What is different about private equity? What challenges does it face by way of just access to information?
Koh:Private companies are very interesting because you have an opportunity and a challenge, right? The challenge is there is less standardized reporting about them in a way that has been regulated as opposed to listed equities companies with SEC requirements and the standardization of reporting. There is also a lag factor in when you actually get the information, because depending your relationship with the underlying company or manager, you might not get information as regularly as you would in the public markets. The flipside to that is you have information rights that if you actually use them, you can get a tremendous amount of information about underlying companies. How you standardize that, analyze that and report that are all the kinds of questions you need to answer if you want to be an active investoror active user of that data to drive your investment judgment and asset management capability.
Snow:Eduard, as you think about the unique attributes of private equity by way of data, what stands out as being the most important or the most challenging?
Lemle:It's portfolio company information on the granular level. What we see is increasing demand from sophisticated investors to better integrate their portfolio construction and also risk management into the broader portfolio with traditional and other alternative asset classes. Doing so will require more granular reporting on private equity portfolios, not just on the invested fund level, but on the underlying portfolio company level. That creates additional data requests we as LPs have been submitting to GPs.
Snow:Tom, as someone who is the interface between a large private equity firm—Clayton, Dubilier and Rice—and your many limited partners, have you felt that demand for more information? If so, where is it coming from?
Thomas Franco, Clayton, Dubilier & Rice:
There isn't a manager on the planet in the alternative game that isn't being inundated with data requests. Transparency is a good thing—it's a $3-trillion or $4-trillion AUM global business, and a lot of people don't really know how it works. Transparency equals efficiency to some degree, but this business started out as a very entrepreneurial activity. In some sense, private equity firms came into being because they eliminated the agency costs of corporations and bureaucracy. And really, investors wanted their managers to focus strictly on value creation. So, arguably this tsunami of data requests is taking away from the central activityof a private equity firm. I'm not saying that that's bad or good or indifferent. It's just the reality today.
Koh:One way to think about is that there are three categories of information we're seeing increasing amounts of demand for. The first is underlying performance information that helps you actually understand how your portfolio is performing and that happens at the fund level, at the co-invest level or at the direct level if you're involved in all those areas as we are.If you look at listed equities in the emerging markets where we have a substantial amount of activity, you're not going to get exposure to healthcare in the same way that you would in private sector or private equity-type portfolios, telecom or media in the same way. Because most of thoseindustries are correlated much more highly with financial services or mining of minerals—these kinds of things. So, you might want to have an understanding of what's going on in these markets in a way that you actually care about them.
Performance is probably the number-one request we get. It's important to note the other two pieces to the point that was made earlier of data requests that we're also getting. One is obviously around the fees and expenses issues, which have become incredibly important from the point of the SEC. Then, the second one is around the idea of environmental, social and governance standards, ESG standards, where an understanding of the transparency around what's actually happening at the portfolio level and the company level in these value-oriented and risk-mitigation tools is going to become increasingly important. It may not be the bulk of what we're seeing in terms of information requests or what we ask for, but there is certainly a minimum standard of transparency that we're looking for.
Snow:Tom mentioned the term “tsunami” of information. Clearly, this is a demand-driven trend—it's not the GPs suddenly deciding to throw a tsunami of information at their investors. Eduard, as someone who spends a lot of time interacting with LPs and building systems for LPs, where is this demand for information coming from? Why do they want more and why now as opposed to 10 years ago?
Lemle:That's a great question and I would like to use this to bifurcate the discussion and look at the use cases of data from GPs for a large LP like ourselves. Much of the surge of data requests is related to ongoing reporting after fund commitment I made as opposed to the investment selection and due-diligence phase. For investment selection and due diligence, which is what GPs are most worried about and have in the past most been concerned about, the sophisticated LPs in the industry have already sent as nearly a detailed request to GPs 10 years ago as they do now. So, there is less of a fundamental change in that area.
Franco:But, it's also important to note that big data also has some big disadvantages, particularly as it applies to private equity. For example, data analysis is not particularly good at making conclusions about social groups and basically the call for a 10-year-plus GP commitment has a lot to do with the group you're backing and the social dynamic. There has to be injected some kind of balance in the sense that we could be creating a haystack of data that gets bigger and bigger and the correlations—they permeate. Then, at the end of the day, you're looking for the needle in that haystack and it's become much bigger.
Koh:Yes. There is a bit of the dog catching the mailman or mail-truck problem, if you ask for too much data and don't really understand how to digest it. Part of what we try to do is figure out what the key indicators are that make a difference and there is absolutely a monitoring aspect to this.
I completely agree that there is cost to an information overload that can happen once you get all the data. So, you've got a 200-question request—how do you digest it? In that sense, we've actually had an ongoing discussion with some of our particularly international limited partners about how to present data to them in a way that's digestible right on a quarterly basis. Like what's the baseline you can set and what are the deltas from that that actually you have to pay attention to? How do we flag those things to winnow down that data into something that ends up being useful as opposed to just another cost?
Snow:Let me ask all of you to briefly describe the information systems you've built at your respective firms. You don't have to get into great detail, but just what are the most important points about it?What is it designed to do?Has it been enhanced in the past few years to respond to the way the LP demand for information has changed?
Lemle:We've definitely invested significant effort and capital into enhancing our systems and processes. It is in three parts: the first is gathering the information, second is the processing and third is sharing appropriately internally with investment teams and externally. Over the years, for internal purposes, we've built very effective templates that are efficient for the internal audience and for regular reviews. Also for external investment reporting, being more and more customized. That has changed the industry. Our investors want very customized, very specific ways of how their portfolio is reported to them. So, in addition to the print reports, we've built a very sophisticated online reporting tool that allows investors to slice and dice their portfolio based on whatever parameters they want to choose.
Snow:Jay, anything important about the way your firm has improved its information and reporting systems?
Koh:Yes, I'd say there are two or three things we obviously take advantage of the information rights we get in the underlying funds we're involved in. Because you're typically one of the larger or earlier investors of these funds and really take that advantage to get information sourced from them in a way that actually helps our investment process, not just the reporting process. Sometimes, just using our relationship with the GPs to make sure we have that kind of performance information at the transactional level. Not all that information will ultimately get reported back to LPs and not all of it should because of the data overwhelm problem you could have for the LPs.
Franco:We are trying to make great investments that generate great risk-adjusted returns. Transparency, or the demand for transparency, is unlikely to diminish. The good news is that we have plenty of data. The challenge is how we roll that data up in a way that is efficient and responds to your needs. We're happy to do that. Fortunately,over the last several years, there have been technology platforms that enable this process. iLevel happens to be one that we use and we think is effective. So, where we are as a firm is evolving to meet these demands for transparency and to do so in an efficient wayusing outsource providers with expertise. We'll see how that develops over time, but the goal would be to get an integrated system internally where finance, deal teams and the portfolio companies are all in a connected ecosystem. The data is there—it's just hard to generate it when you get 200 or 300 DDQs when you're out raising the money.
How can iLevel’s platform help the private equity asset class grow?
Hank Boggio, iLevel Solutions:
At iLevel, we believe that by providing a limited partner or institutional investor with deeper access to data, they’ll have the ability to have more confidence in their data and to effectively be able to monitor and measure the performance of their portfolio, ultimately increasing the asset class allocation and getting better returns in total.
Talk about iLevel’s origins within the Blackstone Group.
Boggio:Today, over 100 GPs use our technology. Blackstone realized several years ago that inefficiency of having access to data that was spread across the organization, prone to errors, difficulty in trying to aggregate that. They are very time-consuming processes. They have expensive resources on the investment teams that were spending upwards of 80% of their time chasing data as opposed to doing what they’re paid to do, which is to analyze that information, assess performance and ultimately source new deals. So, having it centrally stored gave them the ability to effectively and efficiently use that data for a variety of reporting purposes.
Yes. If you look at allocations today from an LP’s perspective, they’re putting a small percentage—6%, 7% or 10% perhaps—into their overall portfolio. The reason that’s so limited is because they don’t or they haven’t had the ability to effectively look at that data to assess risk and exposure. Where do they have an issue in a portfolio? Do they have a particular allocation that perhaps needs to be hedged against the public markets? While the asset class has always outperformed the public markets, or at least, in most cases, has outperformed the public market asset class, they haven’t had the confidence in the data they have. Or, perhaps the lack of access to that data is the reason that they haven’t been able to increase the allocation to the asset class.