The private equity market is a hyper-competitive arena speckled with investors trying to look for reliable methods to find market indicators that can help them draw insights and thus, place better bids. This requires a considerable amount of due diligence to be conducted before making the decision. ‘Due diligence’ in this context refers to an audit of a potential investment or product to confirm the veracity of all facts, that might include the review of financial records.
This research is often done before entering into an agreement or a financial transaction with another party. Investors and bidders conduct this process before buying assets from a company. A major part of this process heavily depends on data and technologies that can convert raw data into actionable insights. This blog talks about how web-scraping has a major role to play in this process. But first, let’s look into the due diligence process that private equity firms and investors conduct.
Due Diligence in the Private Equity Market
There are some key questions that investment professionals ask to draw actionable insights. A report by Preqin covers these aspects in detail. We have covered some of them here:
1. What are the key indicators that a fund will successfully meet its fundraising capital?
If you are an investor, you would want to know if the fund you are eyeing will raise sufficient funds. Agents place high importance on the experience or the expertise with fund strategies to determine if a fund will achieve its fundraising target. A successful performance track record at a firm level is also a key indicator of a fund being successful. However, service providers in the private equity market prioritize an individual’s or a teams’ track record ahead of a firm’s track record. This strongly indicates to the investors, the necessity to undertake due diligence on the partners and team managing the new fund, rather than just relying on firms’ reputation and past performance.
2. What are the key indications that a fund will outperform its peers?
This question will help you determine if your choice of the fund is better than its peers. As you would have imagined already, the performance of the team largely determines if a fund will outperform its peers- more than the firm itself! Experience or expertise with the fund strategy being employed in the current fund offering is again important. If you are an investor, you should be vigilant to account for strategic drift. All these factors together can indicate if a fund will outperform its peers.
3. What are the best practices that an investor should follow to get access to the best fund offerings?
A large number of fund managers struggle to close capital in the competitive private equity market. Moreover, funds being raised by top-tier fund managers, especially those with a clear track record of delivering high returns, can become quickly oversubscribed. Records show that 80% of investment consultants and around 60% of placement agents claimed that top-tier managers are extremely particular about which investors can be allocated to their investment vehicle. Due diligence thus, is highly regarded.
However, with increasing competition among investors for the best funds, investment professionals should also make swift commitment decisions. An investor should also follow the best practices. He should not be too demanding with the fund terms and conditions. He should also be willing to make a sizeable commitment.
Now that we have delved into a few aspects of the due diligence in the private equity market, let us see how data and in turn, web scraping plays a pivotal role in this space.
Why do you need data for surviving in the complex private equity market?
All investment markets look for diverse, novel and well-described financial, economic, and alternative datasets to gain a competitive advantage. Private equity is no exception!
Private equity firms across all industries are heavily relying on data analytics and operational due diligence (ODD) to:
Identify and screen fast-growth businesses
Recognize the opportunities for value-creation with great confidence
Identify potential deal-breakers and underlying commercial risks
Recently, we’ve seen a growing number of data analytics tools that are capable of significantly accelerating the process. You can use these tools to extract data from multiple entities. You can then organize the same, and in turn assemble, clean and visualize data to use it effectively. A lot of these AI (artificial intelligence) and ML (machine learning) tools can also scour thousands of files and contracts, find keywords and clauses, further speeding up the due diligence process. This particularly helps firms with multiple add-ons and minimal integration.
There are a lot of datasets and data-driven tools for the same. Alternative data, however, outshines all the other forms of datasets. Now, why is that? Before we get into the reasons, we need to cover what alternative data means. Alternative data are nothing but, unique datasets which when combined with traditional investment market data provides a competitive edge to investment professionals. Studies show that individuals in the private equity market are increasingly using web scraping to extract alternative data sets to differentiate themselves from the competition. These datasets help solve a number of purposes. They provide insights that perhaps, you would not find elsewhere. Let us look at some of these insights.
What insights can we drive from alternative data?
Private equity firms are using alternative data and applying advanced analytics during due diligence on several fronts. Most of this alternative data is scraped from the web. These datasets include real estate market data, customer reviews, and even geographic and demographic data, among others.
1. Financial Data: A lot of global funds extract financial information and filing data from websites like the U.S. Securities and Exchange Commission (SEC). They then use this data to keep track of the economic and financial activities happening in the market before it hits the press a few hours later. This gives them insights into funding data and other important firm-related data.
2. Product assortment: A lot of potential acquirers mine and analyze product assortment data to assess the relative pricing, assortment and discounting strategies of target companies in various industrial verticals like retail, consumer products, and technology.
For instance, in due diligence of a women’s clothing retailer, an SKU assortment analysis revealed that the retailer provided a wide selection of items at comparatively lower prices. you can also extend this approach to fund offerings and products in the private equity market.
3. Employee costs and organization: Online data allows a due diligence team to sort employee counts by role or department, estimate personnel costs and assemble a rough organization chart. Not only does this provide a perspective on the employee mix and cost, but it also sheds light on the calibre of talent management.
Let us take a simple example. An abundance of spans and layers may indicate an opportunity to reduce headcount. It also provides room to plan how the company manages talent. A multinational sporting goods retailer, Bain & Company worked with a private equity firm on its due diligence. Here, they combined online data with store visit observations for the potential buyer. Thus, we saw that the target firm performed better when compared to its peers. It showed a higher proportion of store managers and support staff relative to store employees.
4. Real estate market data: Companies show interest in the movement of real estate properties in the market. It also shows how these properties have changed historically on the basis of geography and other demographic factors. This dataset helps companies make intelligent real estate buying and selling decisions. Moreover, it helps investors conduct a thorough due diligence process before making decisions on how to invest in the market.
5. Customer reviews: Customers write about vendors and various offerings. This can deepen the understanding of differences among competitors in products, service or the overall experience—or among a target company’s locations. In one particular example, the process of due diligence of an amusement park company analyzed reviews on a leading American travel and restaurant website company to confirm primary research and understand the company’s competitive position.
6. Social media postings: Social media is one of the most valuable sources of alternative data. You can not only mine data about demographic trends but also the sentiments of the public. Social media postings can unveil trends in sentiment and share of voice for a brand that people talk about on the web. The due diligence process of a European retail health provider covered an analysis of online blogs, forums, and news. This helped the private equity firm describe and confirm what the public felt about the company and the brand.
7. E-commerce: E-commerce data is a gold mine of economic and trade-related data. A lot of software firms crunch web traffic data to assess the search effectiveness, conversion rates and purchase sizes of traders, online retailers and goods and service providers. Analysis of this data helps to identify the size and nature of post-acquisition sales opportunities.
8. Geographic presence: Geographic analysis, especially when combined with demographic data can uncover a competitive presence in individual markets and potentially under-served markets. In most cases, we combine this data with other sources of data for more nuanced analysis. For example, the due diligence of a US industrial products distributor used location data from the target company and competitors to reveal which area codes led to expansion or opening of new facilities.
Summary
Although most of the above nitty-gritty sounds ideal in theory, there is a possibility of failure in all analytical tools. They can perhaps, only cover data from online sources. Procuring data from offline sources can become a little difficult. Additionally, they do not yet replace alternative methods of research such as market participant interviews, customer surveys and intercepts, store visits and literature searches.
One needs to perform well-rounded due diligence using web scraping to complement traditional research. This can help form comprehensive insights. Moreover, software tools are limited by their ability to replace business judgment. Even a few positive or negative reviews could skew the results in either direction. Thus, it becomes necessary to couple algorithms and the human sense of judgment to derive maximum efficiency.
Wish to extract web data to perform well-rounded due diligence using web scraping for your private equity firm? Get in touch with Datahut, your web scraping experts.