Finding the informational advantage in private equity

Overview

What was previously a nascent area of the private equity market, where technology companies were bootstrapped prior to IPO, the growth equity market has now matured. Concurrently, the availability of alternative data has blurred traditional dividing lines between public and private companies. In this report, we consider opportunities to apply predictive data science to chart a new path in private markets.

Alternative intelligence

Alternative data can provide valuable insights into the growth prospects of individual companies, sectors or themes. Innovative investors are beginning to extend to private markets the same systematic, data-driven processes that have been successful in public markets for decades. Consider the insights available through online job postings data sets alone. This rich data set can reveal many granular details about an industry, a sector or a specific company — providing real-time insights to assess which sectors are positioned for outperformance, which companies are experiencing increases in demand and what opportunities executives are positioning for strategic growth. What’s more, as shown in the chart below, the coverage of private company job posting data is roughly 400 times greater than that of public companies.

Online job posting coverage of public vs. private companies

400x more private than public companies

The growth equity opportunity

Until quite recently, growth equity was a nascent area of the private equity market where technology companies were bootstrapped prior to IPO. In 2022, the growth equity market matured to reach USD 112 billion of deal activity, up from USD 23 billion in 2010 (see chart below). In years past, it was exceedingly rare for companies to achieve a USD 1 billion valuation without access to public capital (hence the name “unicorn” to describe the statistical rarity).² As of the end of September 2023, there are over 1,200 companies boasting this status, turning their once mythical status into a more common sighting.³

^{U.S. private markets growth equity activity}

Growth equity market has matured to USD 63 billion of deal activity

Data-driven approach in private markets

If growth equity companies are staying private longer, it may be no surprise that private and public company data footprints are increasingly similar. While private companies have the luxury of forgoing the formal data disclosures required of publicly traded companies, digital footprints are not obscured by the difference in capital markets construct.

Reimagined portfolios

The ability to recognize and source new investment opportunities is arguably the most important function of the growth equity investment process. Historically, sourcing the attractive deals has been relationship-based. Today, data science techniques have raised the bar, allowing pioneering managers to look beyond their network and proactively detect attractive company characteristics using predictive models. Systematic models seek to offer scalability, enhanced efficiency and improved portfolio outcomes by evaluating a universe of thousands of securities. A systematic approach aims to provide investors the opportunity to uncover opportunities that traditional methods and models may have overlooked, with a faster view and with a higher degree of certainty.