Competition on data sophistication is heating up among private market fund managers.

The scale of available information is reaching dizzying new heights, but getting the details you need, whether for investment selection or portfolio analysis, remains a daunting challenge. However, at a growing number of firms senior leaders are seeing data fluency as a differentiator as they raise funds in a crowded market.

At the start of 2022, several industry trends are helping drive this expanded interest in data analytics: squeezing more insights from portfolio performance, meeting the ESG reporting challenge, and reporting quality data to investors.

Investors are growing their sophistication in portfolio measurement and attribution

Techniques from public market performance attribution are increasingly finding their way into the private markets. As fund managers invest in better data collection and analytical tools, they can make more meaningful comparisons to benchmarks and understand the source of returns, then apply those insights to their future investment decision-making.

How does it work? Some firms are systematizing the data they capture at the portfolio company level. That data informs both their internal conversations and their LP reporting, where they can provide full transparency about each underlying portfolio company. Savvy investment professionals are taking this a step further and analyzing that data to understand its implications for strategic planning and portfolio construction. They are moving beyond benchmarking as a measure of opportunity costs, and instead using it to spot opportunities in the market, whether in whole sectors or individual target companies.

This type of performance attribution analysis couples well with another data project: acquiring better information about investable companies. More fund managers are seeking novel data sources and technology solutions to help them source investments. As the CFO of one fund manager reports, "We have a proprietary database of companies that we mine on a daily basis to see which companies might fit our thesis."

ESG impact analysis means more data needs to be collected, interpreted and reported to investors

ESG metrics are increasingly important to LPs, and senior firm leaders now see how essential it is to have a plan to respond to investor requests on sensitive topics like diversity and inclusion statistics. This poses clear data collection challenges, made even more complicated by the nuance required to communicate the information in a meaningful way. In the absence of universal reporting standards, more firms are finding that they need to spend time educating investors about types of ESG metrics and how they should be interpreted in the context of their portfolio.

Data reporting risks are more prominent and require heightened vigilance

How can firms maintain quality as they report on hundreds of new ESG datapoints? The flood of ESG data casts a new light on the perennial concern of data controlling and governance.

Smaller PE fund managers have traditionally relied a great deal on portfolio company CFOs for data control, while others may have had more staff devoted to ensuring quality. In either case, it is a growing risk management challenge—particularly when reporting to regulators and investors.

Large private markets firms are likely on the brink of a transition to more sophisticated enterprise data management systems. Growing volumes of information require a data strategy and governance model that can ensure a single version of truth for each metric across the firm. Not only does this help neutralize controlling risks, but it also helps address cybersecurity threats in an environment where it has become increasingly important to be able to demonstrate to customers and clients that their data is safe and secure. In the words of one PE executive, "You need to protect it both in terms of safety, security, and from a cybersecurity perspective, you need to know how and what systems are interacting with it."

Getting started

The technology and data management challenges PE firms face are complex and multi-faceted. Decisions about system architecture and collecting data must be an inclusive process.

Start with the foundational questions: What data do we need to collect? How will it be used by different team members? What is needed for effective portfolio analysis; what is needed for reporting? How do we satisfy our investors and limited partners with deeper and more thoughtful information? What processes are in place to ensure that portfolio data is high quality and accessible? What technology do we need to store, share and analyze the portfolio data?

IHS Markit works with alternative asset managers of all sizes to help them find answers for these and other complex questions about their data strategies. Learn more about how we help firms innovate with our Private Market Solutions.

S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.