Finding the Single Source of Truth in Private Equity Data

We all know what information overload feels like.  There are news alerts, articles, emails, instant messages, and texts popping up throughout the day. And this doesn’t account for the information we seek out through internet searches, social media sites, and good old-fashioned paper.

In private equity, this overload takes on new proportions.  Because of the lack of consistency and industry norms, private equity has always been data-intensive, yet today’s practitioners are confronted with a deluge of new information arriving in a variety of different formats. As markets have contracted and alpha has become more elusive, managers have widened their scope in search of data that helps them in their fundraising goals and investment decision-making.  At the same time, investors have greater data needs to manage performance reporting, governance and regulatory compliance.

With few established best practices to guide them, GPs and LPs are still experimenting with how to capture the full value from their data. Both sides of the PE equation agree that making sense of their data, finding that single source of truth, is essential in the search for alpha.

Define Data Needs

Where do GPs and LPs start when seeking the single source of truth?  Often, it starts with conversations around specific data needs.  Starting the conversation with a more nuanced view of data, a clear understanding of how it will be used, and agreement regarding the timing of delivery can help managers and investors align objectives.

A good place to start, for both investors and managers, is to evaluate the different data components, keeping in mind how and when the various elements will be used and how important they are to both the organization and the stakeholders. Often, investors echo that they are looking for greater data transparency. Does that mean all data, or only specific data? Do they want a better understanding of valuations and expenses? Are they clear about their timing needs? And managers may be able to provide certain levels of data transparency but not others, depending on their system or operational capabilities. 

Both GPs and LPs will want to strike a balance that provides the information they need when they need it while ensuring that sensitive information or unnormalized data is not widely circulated, which can create a false benchmark.

Reach Consensus to Shape Productive Solutions

All parties to PE investing would benefit from industry consensus around data and transparency.  There needs to be industry dialog, between GPs, LPs, service providers, industry bodies, regulators and valuation firms, that reaches across barriers and involves all parties in an industry-neutral setting.

There have been wider spread efforts to create standardization around data transparency in private equity investing, especially in the wake of the liquidity crisis in 2009. The buy-side advocacy firm, Institutional Limited Partners Association (ILPA) advocated for the standardization of capital call, distribution and valuation information as far back as 2005. The International Private Equity and Venture (IPEV) Capital Standards Group put forth a principle-based approach for completeness of statements rather than rule-based standardized templates. Finally, the Standards Board for Alternative Investments (SBAI) advocates for a framework of transparency, integrity and good governance to improve the alternative investment industry.

Role of Data Aggregators

Data aggregation is a foundational issue for PE investing.  Data collection and validation for private equity investments can be challenging, making the provision of transparency more elusive. In a process that is often manual, data aggregators play an important role in providing clarity into the valuation process.  As central repositories, they provide key data sorting, cleaning and distribution services. 

When it comes to the question of finding the single source of truth in PE investing, compromise between individual investors and their managers will remain important. The first step involves taking a more deliberate and nuanced approach to data and transparency discussions among all parties. It may require both sides to better define their data needs, and what tradeoffs they’re willing to make. The next step involves finding industry consensus that can help create better practices and agreement around key issues. And finally, leveraging data aggregation services can help all parties obtain meaningful insights and full value from their data. The solution surfaces when all parties work together, allowing the value to transcend individual needs.