Private equity firms are always looking for new ways to gain an edge in an increasingly competitive market. In recent years, alternative data has emerged as a promising source of information that can provide unique insights into markets, companies, and consumers. As a result, alternative data has become an indispensable tool for data scientists, and investment managers at private equity firms, VCs, and hedge funds.
In a 2021 study conducted by Bright Data and Vanson-Bourne, which surveyed 100 investment industry professionals in the U.S. and U.K — 64% stated that they “use alt data as part of formulating their ongoing investment strategies”, while 59% claimed they “leverage it in order to understand and improve customer experiences crucial to retention, and client-acquisition.”
Here are four reasons why private equity firms should use alternative data:
Unique insights into markets: Traditional sources of market data, such as financial statements and analyst reports, can be useful but also have limitations and private companies don’t necessarily publish those reports. This is where creative sourcing and analysis of alternative data can make a huge difference. Alternative data can provide a more granular view of markets by collecting data from a range of sources, including transactional data, e-receipts, location data, social media, online reviews, and web traffic. By analyzing this data, private equity firms can gain insights into market trends, consumer sentiment, and the competitive landscape that may not be captured by traditional data sources.
Early warning signals: Private equity firms are always looking for ways to identify potential risks early. Alternative data can provide early warning signals for a range of risks, including supply chain disruptions, regulatory changes, and reputational risks. By monitoring alternative data sources, private equity firms can identify potential risks before they become significant problems and take proactive steps to manage them.
Better due diligence: Private equity firms typically spend a lot of time on due diligence to identify potential investment opportunities. Alternative data can provide a more comprehensive view of a company’s performance and potential by collecting data from a range of sources. By analyzing this data, private equity firms can gain a more nuanced understanding of a company’s performance and identify potential risks and opportunities that may not be captured by traditional due diligence methods.
Competitive advantage: In a crowded market, private equity firms are always looking for ways to gain a competitive advantage. Alternative data can provide a source of information that is not widely available, which can provide a unique edge. By using alternative data to gain insights into markets and companies, private equity firms can make more informed investment decisions and stay ahead of the competition.
Alternative data is an indispensable source of information that can provide private equity firms with unique insights into markets, companies, and consumers. By using alternative data to gain a more comprehensive view of potential investment opportunities and identify potential risks and opportunities, private equity firms can gain a competitive edge in a crowded market. Contact Pyxis to learn more.