Interact 2024: Harnessing Operational Alpha in Private Markets

Senior finance and operations leaders from investment firms shared their thoughts on how to drive superior returns by unlocking operational alpha, during a panel discussion moderated by Chris Sparenberg (Head of iLEVEL at S&P Global Market Intelligence) at this year’s Interact conference in New York in October.

As private markets continue to grow rapidly, the ability to collect and analyze ever-greater volumes of data is becoming an important focus for modernization efforts, as firms seek operational and investment alpha. One panelist noted that achieving the goal of making data available and open to everyone in their firm is a long journey. While another speaker, from a newer firm, said they took a technology focus early on, getting systems in place that made it easy to scale their data capability over time.

The speakers exchanged views on opportunities to streamline the collection of data from portfolio companies. “News flash – portfolio companies don’t love filling out templates,” noted one panelist. To encourage companies to report every six months, the investment firm replies quickly with benchmarking reports, giving new information back to the portfolio companies. This shows there is a purpose and value to submitting the data.

Sparenberg explained that data collection is one of the many aspects of the investment lifecycle that S&P Global supports through its iLEVEL solution and iLEVEL Managed Services. This includes making a significant investment in AI to automate the process of ingesting large volumes of data that power analytics and support decision-making.

Once collected, the speakers agreed on the importance of mastering and enriching portfolio data to inform their asset management decisions. An investment firm panelist said they developed a dashboard to monitor how their portfolio companies are performing on a monthly or quarterly basis. The investment climate has been “tough” in the past 18 months to two years, this panelist said, so having a handle on portfolio company data supports better decisions about where to invest.

The discussion highlighted a wide variety of ways in which firms are putting data to use in pursuit of alpha. One speaker gave the example of developing case studies about how they have added value to portfolio companies. Such reports are highly valuable for supporting investment opportunities with new target companies.

Having regular quarterly data sets from portfolio companies provides a diagnostic for identifying which investments are performing to expectations, where to focus management activity, and which companies are candidates for additional investment. While collecting and processing data is often still manual, it cannot stay this way, said one panelist. GP deal teams want the data, so it is incumbent on them to collect data, sanitize it and then distribute it cleanly, they said.

The speakers agreed that, while sophistication levels vary across the market, AI has created new opportunities to increase operational alpha by addressing longstanding data challenges – and it is critical for firms not to be left behind.