Data-Driven Private Equity: Back to the Future Strategy

Many private equity firms have successfully relied on old-school deal-making, rainmaker networks and relationships to find and close deals.

But knowing the right people isn't enough anymore. The market is becoming more competitive and some firms like Aura Private Equity are turning to a data-driven approach and advanced analytics to find an edge in the market, using a combination of proprietary, third party and alternative data to drive investment processes, decision-making and generate additional alpha.

Data gives dealmakers the ability to drive investment opportunities and exits more objectively and efficiently.

Aura Private Equity’s Back to the Future strategy is a Southeast Asian variant of Time Machine Investing, which involves investing in companies in less developed markets that mirror the success of their counterparts in more advanced economies. This data-led approach utilizes reference data from developed markets like Singapore, Korea, China, and India to identify companies in wider Southeast Asian countries, including Indonesia, Vietnam, Thailand, Philippines, and Malaysia, that are poised for rapid growth and economic traction.

When considering the reference markets of Singapore, Korea, China, and India in relation to the target markets of Indonesia, Vietnam, Thailand, Philippines, and Malaysia, there are several non-exhaustive factors to examine for similarity:

• Economic Development: Singapore and Korea are more advanced economies with developed financial markets, technology infrastructure, and high levels of urbanization. China and India, while having certain developed regions, also have segments that are less developed, making them more comparable to the target markets.

• Market Size and Population: China and India are the most populous countries globally, while Indonesia and the Philippines have the highest populations within Southeast Asia. Similarities in population size can indicate the potential for consumer-driven growth and market expansion.

• Cultural Proximity: China shares some cultural similarities with Vietnam, while India has historical and cultural ties with Indonesia. These factors can influence market dynamics and business practices.

• Industry Composition: Analysing industry sectors in the reference markets can help identify similarities to the target markets. For example, Singapore's strong finance and services sectors may align with Malaysia, while Korea's tech industry could be comparable to Vietnam's.

Analysing these similarities (as dissimilarities) helps investors identify potential growth patterns and adapt successful strategies to the target markets.

Private equity investors can leverage private funding, mergers and acquisitions (M&A), initial public offerings (IPOs), and listed company data to assess the potential for successful investments in certain industries and to navigate challenges specifically in Southeast Asia like the ability to exit. Each country in Southeast Asia presents its own set of characteristics and exit challenges for private equity investors. Understanding these challenges is crucial to developing value creation and effective exit strategies. These factors provide valuable information that helps private equity investors evaluate investment opportunities and make informed decisions. Here are some examples of how each of these factors can be utilized in predicting the ability to exit in specific industries:

• Private Funding: Private equity investors can analyse the amount and sources of private funding received by companies in a particular industry. Higher levels of funding indicate investor confidence, strong growth prospects, and potential interest from other investors or acquirers. Private equity investors may view companies with significant funding as more attractive investment targets, as the availability of capital can support expansion plans and increase the likelihood of successful exits.

• Mergers and Acquisitions (M&A): The frequency and scale of M&A activities within an industry can provide insights into exit opportunities. Private equity investors monitor M&A trends to gauge market dynamics and the level of interest from strategic buyers or other private equity firms. Industries with a history of active M&A transactions suggest a robust market for exits. Private equity investors may target companies in such industries, anticipating potential acquisition opportunities as an exit strategy.

• Initial Public Offerings (IPOs): Private equity investors consider the IPO market as a potential avenue for exits. They assess the performance of IPOs within a specific industry to understand investor appetite and the potential for successful public offerings. A track record of successful IPOs within an industry indicates that companies in that sector may have a greater ability to exit through this route. Private equity investors may invest in companies with IPO potential, aiming to benefit from the increased valuation and liquidity that can accompany a successful public listing.

• Listed Company Data: Once a company goes public, its financial performance and other relevant data become publicly available. Private equity investors analyse the financial reports and key metrics of listed companies within a targeted industry. Positive indicators such as revenue growth, profitability, market share, and operational efficiency can suggest a higher probability of successful exits. By assessing the listed company data, private equity investors can gain insights into the potential exit opportunities within that industry.

By examining these factors, private equity investors can make informed investment decisions and develop exit strategies tailored to specific industries. Industries with strong private funding, active M&A, a history of successful IPOs, and favourable listed company data may be considered more conducive to successful exits.

Taking a data-led approach in private equity deal-making offers several advantages over traditional methods. By leveraging data, investors can make more efficient and objective decisions. Data provides accurate insights into market trends, historical performance, and financial metrics, reducing reliance on subjective judgments and biases and key men or women. This approach enables investors to screen a more targeted pool of companies and have deeper fundamental understanding of more relevant industries and business models.

Combining Time Machine deal sourcing with bottom-up analysis and optimal deal structuring can enhance risk-reward outcomes in the realm of private equity. Time Machine Investing provides a data-driven approach to identifying high-potential opportunities, while bottom-up analysis ensures a deep understanding of individual companies and their growth prospects. Optimal deal structuring then enables investors to align their interests, manage risks, and enhance returns.