Samantha Lee/Business Insider
It's difficult to assess the value data-analytics capabilities currently have when it comes to private-equity investments, given that the development is still nascent. One source called it a "greenfield" opportunity.
Insiders say that private-equity firms have been slow to adopt data analytics because the added value for the amount of time and investment needed to build a decent data set is yet to be proven.
But PE firms have started to take steps to built out their data capabilities with new hires. We interviewed more than a dozen insiders including PE execs, recruiters and consultants to better understand the firms, like KKR, Blackstone, and Neuberger Berman, that are entering the race.
Using quant methods will be the norm across all PE players in 10 years, believes Afsheen Afshar, the former head of Cerberus Capital Management's data analytics division. "The winners will be the ones who do it sooner, and faster, and more wholesomely," he said. "The losers will sit and watch."
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Private-equity firms have long relied on human judgment to pick investments and figure out how to generate the best returns from them. It's only in recent years that more formalized data-crunching has been added to the mix.
And that all comes against a backdrop of PE firms having massive amounts of undeployed capital, and worries that they have bid up valuations to buy so much that it's hurting potential returns.
That's given quant-type roles more allure as a way to find an edge, but insiders say it can be hard to go all-in given the structure of firms and the time-frame of their existing investments.
The industry is still a long way off from the quant revolution that has transformed the hedge-fund world, where at some shops quants and algo-based models are driving investment decisions. After all, hedge funds - which have relied on algorithms to deliver returns based on shorter-term trading of public stocks - can glean insights through data easier than PE shops, whose portfolio companies are mostly private businesses.
Yet some PE firms have started to take steps to beef up their data capabilities and Business Insider interviewed more than a dozen insiders including PE execs, recruiters, and consultants, along with reviewing quant job postings, to better understand which firms are placing their bets.
Most said that it's difficult to assess the value data-analytics capabilities currently have when it comes to private-equity investments, given that the development is still nascent. One source called it a "greenfield" opportunity.
But sources also felt certain that PE firms' current investment in data will be critical in determining their investor returns over the coming decade.
"My view is that 10 years from now, every single firm will be doing this," said Afsheen Afshar, the former head of Cerberus Capital Management's data analytics division who served in the role between 2017 and 2018.
"The winners will be the ones who do it sooner, and faster, and more wholesomely," he said. "The losers will sit and watch."
So with that backdrop, we decided to dig in and learn which firms are making the most significant moves in the emerging field of PE data science.
We found that there were some upstart firms, like Two Six Capital, founded in 2013, that staffed PhDs and professors in analytics to offer insights to PE firms while also making investments of their own based on their research.
And then there were larger firms like Cerberus Capital Management and The Blackstone Group, which had built out their own internal data-science units. Blackstone hired Matt Katz from hedge fund Point72 to head up a data science unit within the firm in 2015, while Cerberus Capital launched a whole subsidiary called Cerberus Tech Solutions with former JPMorgan executives in 2018.
The activity, however, is by no means happening across the whole industry.
"There is a lot of, 'he said, she said,' and 'hey, what's going on out there,'" said Ryan Bulkoski, a recruiter with the firm Heidrick & Struggles. "What I see less of is firms pulling the trigger."
One of the biggest challenges PE firms face in building out data science teams is a lack of existing data infrastructure that would enable them to be effective, he and other insiders said.
"Just as any PE firm is looking at a five- to 10-year horizon over investments they make, you're going to need at least three- to five-year run rate of a team operating consistently to go out and then prove their ROI," said Bulkoski, referring to return on investment.
He added: "You can't go from zero to artificial intelligence."
To best understand PE firms' data ambitions, it is important to distinguish the types of roles in which firms are hiring.
At the junior level, some firms are hiring analysts, associates and principals with quant backgrounds. Blackstone, for instance, has hired some analysts from tech giants like Google and Microsoft who previously worked in analytics, software engineering and computer science, according to a review of LinkedIn.
Then, there are more senior positions, including operating executives - or people who help improve a PE firm's portfolio companies through operational changes.
"There is this emergence of the front-office technology team, which complement the portfolio both at deal phase and operational phase," said Tony Morales, a recruiter with N2Growth, noting that firms look at companies like VMWare, Google, and Amazon for those roles.
Meanwhile, some chief technology officer responsibilities have morphed to include not just managing a firm's own IT, but also learning how to act on the private company data they hold, insiders said.
What is less common, however, is firms that have started to build out their own teams devoted entirely to mining private company data, analyzing buying and other industry patterns, and then acting on those insights to find deals or improve portfolio companies.
This internally-developed capability "is just getting started," said Afsheen, the former Cerberus executive.
"It's in its infancy," he said.
That could very well change, though, as PE shops have the financial backing to make it well worth a technology executive's while to join their team. Morales, the recruiter, said PE shops can offer guaranteed compensation packages to chief technology officers or equivalent positions that amount to annual, eight-figure payouts over three or four years.
And as for why a tech exec would join a PE firm, he said the ability to influence the businesses of multiple companies instead of the functionality of their own, is a draw.
Whatever the case may be going forward, Afsheen, who worked at JPMorgan prior to his time at Cerberus and is a PhD / MD from Stanford University, has a view that private equity will need to be more inclusive of data scientists and engineers if they would like their analytics to actually work - hiring them to work as investment professionals, and not just as operating partners who traditionally have not held as much influence in a firm.
To the extent private equity-firms are building out data analytics platforms, we put together a list of six firms to watch.
We'll be keeping an eye on the space, so please do consider us for tips and information about the emerging field.