This article originally appeared in our market brief, Why a lack of private market data exposes investors to more risk, which explored how overlooking private market data can create blind spots when calculating valuations, sourcing deals and tracking market trends.
The rapid evolution of the private markets has posed many challenges for investors.
Relying on outdated methods of collecting information for market intelligence can be counterintuitive. The innovations that have been applied to traditional deal sourcing are also being implemented to other parts of a firm’s strategy—such as market research, analysis and investment strategy.
Especially as the GP and LP relationship evolves (e.g. GPs working to meet LP demands), it’s increasingly important to understand underlying market factors that may be indicators of emerging trends or industries.
How a lack of private market data could result in falling behind the market—or competitors
Clients and partners expect expertise, so not being aware of market trends is the quickest way to lose business. A corporate or investment strategy that’s blind to the latest market data risks being outdated quickly, significant loss in revenue or worse.
However, relying solely on public market data for market signals can be equally risky. The public landscape won’t give the level of detail needed to fully understand private companies or even a competing firms strategy. Anticipation and being pro-active are the building blocks of a long-lasting and competitive strategy.
Without a holistic view of the private and public markets, it’s hard to make a confident decision.
Analyzing macro and micro market trends with private market data
Investors who track the private market will be able to refine their theses based on market conditions and—with the right proactive approach—get in front of new investment opportunities.
Especially as markets and companies shift at a faster pace, keeping up with change and adapting accordingly becomes simultaneously more important and challenging. It requires constant analysis to understand what a particular space looks like, how it’s evolved and where it’s headed.
In today’s environment, a competitive advantage starts with data. With a few data points analysts can further investigate an emerging trend or opportunity to decide whether it’s worth pursuing. However, to make the process more efficient, some firms are leveraging algorithms and machine learning to comb through as many data points as possible.
The industry’s evolution, in combination with sophisticated market analysis tools, has offered more ways for investors to customize their exposure. Especially as companies stay private longer, more flexibility in the market has helped firms maintain profitability. Secondary buyouts, for example, are one alternative way investors have flexed the rising versatility in the market.
In 2010, secondary buyouts
represented 36% of all PE-backed exits and were the source of 14% of all buyout transactions. Today, those percentages have increased to 48% and 18%, respectively.
Similarly, access to co-investment opportunities is also on the rise. With tools like secondaries, co-investment and more, the McKinsey Global Institute
claims LPs and GPs can now readily tailor their exposures—not only by asset class and scale, but also by duration, price, risk profile, degree of discretion and many other factors.
Without private transaction information that can detect these trends or capitalize on them as they’re happening, investors are at risk of losing profit and falling behind the market.
Interested in learning more about the risks associated with a lack of private market data? Read the full market brief.