PE firms need to take a look at themselves

With Deloitte’s latest report finding that PE will have a significantly slower growth rate in the next 5 years, its partner Frank Fumai sees value in PE firms using data analytics on their own operations.

As private equity increasingly emphasises operational excellence in tandem with financial engineering, fund managers are left searching for ways they uniquely add value.

Deloitte partner Frank Fumai told Private Equity International that firms should start looking into the data on their own operations. “When private equity firms are thinking about analytics, they're generally not thinking about themselves; they're thinking about their portfolio,” Fumai said. “Historically, it's been a search for returns versus improvement internally.”

he internal use of analytics would help firms not only cut costs and realise efficiencies but also mitigate risks and address the growing regulatory oversight. With all of these intersections coming into play at the same time, private equity firms should focus more on their internal functions, like looking at their management methods across the whole portfolio rather than how they manage 60 portfolio companies individually, Fumai said.

All of these factors might help private equity to potentially enter “a new phase of growth,” according to Deloitte's “Private Equity Growth in Transition: Evolve to Meet Tomorrow's Challenges” report.

“I think you can use private equity firm data analytics as a tool to look within the PE firm,” Fumai said. “For example, for airline travel expenses, who's travelling, what's the spending and how often they're visiting a portfolio company. If you have internal data analysis, you might have the opportunity to mitigate your risk from a regulatory perspective and improve operations just by using that data.”

He added that, while some firms may already be doing this, many fund managers could use data analytics to find new ways to cut costs by looking, at a more granular level, at less significant expenses incurred at portfolio companies, such as details like the amount spent on office supplies or kitchen expenses.

“It's always good to be a little more focused,” he said.

The report analysed a “Moderate scenario” to predict that private equity would grow at a 5 percent compounded annual growth rate from 2015 to 2020, or from $3.65 trillion in assets including dry powder and portfolio companies to $4.66 trillion. This is significantly lower than the 9.3 percent increase between 2010 and 2015 and the 13.6 percent increase between 2006 and 2010, it said.