Why culture could be the missing link in private equity's data challenges

Available data for alternative assets is expanding at top speed, handing managers a goldmine of information and arming them to make savvy investment moves and fine-tune operational efficiencies. Ensuring transparency, quality, and data accessibility has never been more important for general partners (GPs).

Yet the tidal wave of data that organizations are handling poses a significant challenge for private equity firms. Many find themselves struggling to consolidate large volumes of data from disparate, siloed sources.

Projections suggest that by 2027, 55 percent of all global asset management revenues be derived from alternative assets. Despite persistent market fluctuations, the demand for alternative investments has consistently risen over the past decade. Investment in alternatives is likely to remain sky-high over the coming years, fueled by asset owners looking to diversify holdings, pursue alpha through private market ventures, and hedge against inflation.

Against the backdrop of ongoing uncertainty driven by escalating debt costs, market volatility, and inflationary pressures, the search for stable returns and alpha/growth is intensely demanding. This challenging landscape compels alternative investment managers (AIMs) to maximize the use of their assets, capabilities, and intellectual property, with data emerging as a crucial pain point.

The lifeblood of the organization

Data is the lifeblood of an organization -- a strategic corporate asset used to generate information, serving as the foundation for insights that drive decisions. However, primary data must be ‘healthy’ to get the best outcomes from it: characterized by correctness, consistency, accessibility, and ease of understanding across the organization. When these qualities are lacking, data falls short in adding value to analysis and investment decision-making processes, hindering both internal and external stakeholders.

Both GPs and limited partners (LPs) grapple with vast volumes of data, from structured and unstructured, externally sourced, to internally generated. The disparate tools used such as spreadsheets, emails, and files—often stemming from multiple investment funds and companies -- result in highly diverse and complex data networks for most private equity firms. This complexity adds a significant administrative burden on fund managers, diverting resources away from revenue-generating activities.

Fund managers are also tussling with increasing pressure from both internal stakeholders and investors to provide data when requested.

So, how can managers prevent becoming lost in the data deluge?

Tackling this challenge involves investing time and money in overhauling outdated legacy infrastructure to establish a holistic data management approach. While technology solutions can streamline manual efforts and free up staff time, they are not a one-size-fits-all solution. If individuals continue to retain their data on personal computers and documents without integrating it into enterprise data systems, investments in technology risk becoming ineffective.

Culture is the missing piece in establishing trust in data

Organizational culture, mindset, and behavior are as crucial as technology when tackling the data dilemma. Overcoming data management hurdles starts with instilling trust in the data among those handling it. This creates something of a chicken-and-egg scenario. If individuals lack trust in enterprise data, they resort to creating their own data silos, relying on familiar tools like personal Excel spreadsheets. This perpetuates a cycle where enterprise data is incomplete or unverified, further deepening distrust.

The rising volume of data amplifies concerns about declining accuracy and quality. Manual processes and siloed data contribute to the challenge of analyzing and processing data, making it difficult to produce consistent and quality data in a timely manner. What’s more, siloed data can introduce serious regulatory compliance risks and can lead to the misuse of sensitive data.

Coupled with this is the increasing demand for an enhanced investor experience, prompting clients to more frequently seek up-to-date information from GPs, such as ESG data reporting. Yet the complexity of reporting often leads to unsatisfactory response rates, especially from smaller firms that may struggle to respond meaningfully.

The power of data transparency

Trust and transparency -- in data, they go hand in hand. While technology investment is important, a cultural shift is required to reshape the habits of those entrenched in the “always done it that way” mentality. However, transforming the organizational mindset is easier said than done. Establishing and following comprehensive data management and governance processes ensures that all data is captured in the required repository, facilitating easy access to information, and enhancing transparency.

An effective data management strategy functions as a two-way street -- with trust at its core. Clean, accurate, and trusted data feeding into a central repository can have a profound impact on organizational efficiency. With faster access to information, GPs can quickly respond to ad hoc client requests, generate insights, and improve decision-making.

Gaining the support of executive leadership is vital for steering cultural and behavioral changes. Business users such as investment and investor relations professionals need to take ownership of the data they produce and consume, recognizing that data issues extend beyond technology alone. Individuals must ensure accuracy and consistency in the data they are responsible for. A collective buy-in from every employee is essential for robust data governance, minimizing the risks associated with solo working and the creation of new siloed data sources. With staff on board, technology investments won’t be in vain.

Image credit: Pavel Petrov/Dreamstime.com

Vera Huang is Sales Director, Data Services at IQ-EQ.