Alternative data private equity strategies are integral to private equity and hedge fund transactions.
A recent MIT Sloan Management Review study found that “Fortune 1000 companies are now recognizing that they must become more adept at leveraging their data assets if they are to compete successfully against highly agile data-driven competitors.”
Companies that want to stay competitive in today’s market have to not only collect and analyze qualitative data but also use it strategically. And, yes, that includes turning to alternative data sources to uncover unique opportunities.
But what is alternative data, and why is it a crucial piece of private equity data science?
In this article, we’ll examine the keys to alternative data private equity analysis. We’ll also share answers to some frequently asked questions, like:
- What is alternative data?
- What are some benefits of using alternative data in private equity?
- What are the top alternative data sources for hedge funds?
- What challenges should you be aware of when working with analytics/private equity data?
Keep reading for all the answers you need about leveraging alternative or qualitative data in private equity decision-making.
What Is Alternative Data?
Alternative data, also known as fringe or non-traditional data, is any information firms can use to make investment decisions that are not typically found in financial statements.
Reviewing and evaluating alternative data can help you better understand a company’s performance and make more informed investment decisions after gaining a more holistic view of a deal.
Thanks to big data, everything is being tracked, and more and more qualitative data is available. In the past, this type of data was hard to come by, but now there are plenty of sources that private equity firms can use to get their hands on this valuable information. And yet only 27% of private equity investors say they use alternative data in their processes.
5 Examples of Alternative Data
There are a variety of alternative data sources for hedge funds. Some common types and formats include:
1. Web scraping – the process of extracting public data from websites. Firms can do this manually or use software designed by private equity data science teams.
2. Satellite imagery – a type of data captured by satellites orbiting the earth. For instance, you can use satellite imagery to track the number of cars in a parking lot or the amount of activity at a construction site.
3. Social media – data generated from social media platforms, like Twitter, Facebook, and Instagram. It can be used to track sentiment or other hidden signals to understand how people are talking about a particular topic or company.
4. Crowdsourcing – involves gathering data from a large group of people, often through online platforms. You might use crowdsourcing, for example, to collect data about traffic patterns or the prices of goods and services.
5. IoT data – information generated from devices that are connected to the internet, including thermostats, fitness trackers, and security cameras. You could use this data to understand how people use a particular product or service or to predict future trends.
Why Is It So Important to Include Alternative Data and Hidden Signals in Analytics/Private Equity Data Searches?
Private equity firms that source alternative data can experience several benefits. Here are just a few:
1. Gain a competitive edge. With the proliferation of big data, alternative private equity data sets investment opportunities apart. Private equity firms that use this data can gain a competitive edge over their rivals and get a well-rounded look at deals before moving forward.
2. Improve decision-making. Alternative data can complement traditional financial data and provide a clearer picture of a company’s attractiveness, helping private equity firms make more informed investment decisions.
3. Generate alpha. Alpha is an investment’s excess return over and above the market return. Firms can generate alpha by using private equity data.
4. Reduce risk. Alternative data can help private equity firms mitigate risk. For example, suppose a firm is considering investing in a company heavily reliant upon a few customers. The firm could use qualitative data to track the health of those customers to help mitigate the risk associated with customer concentration.
What Are Some Challenges Associated With Using Alternative or Qualitative Data in Private Equity?
Sure, there are a lot of benefits to using alternative data in private equity. Still, there are just as many potential challenges firms must be aware of when using qualitative data. Some might be:
1. Finding the correct data. With the mind-boggling amount of data now available, firms might not know which data is most relevant or how much weight to give certain information when analyzing a potential opportunity within the right markets.
2. Ensuring data quality. Private equity firms must ensure the data they use is accurate and up-to-date. If not, they could make a bad investment decision.
3. Incorporating alternative data into existing models. Many private equity firms need the ability to integrate alternative data into their existing financial models. If they don’t, they can’t evaluate any hidden signals they might have discovered.
4. Managing data privacy concerns. Alternative data often contains sensitive information, like location or health-related data. Private equity firms must comply with all relevant regulations – beyond simply being aware of privacy concerns.
The most successful private equity firms are aware of the benefits and challenges of using alternative data and use that knowledge to their advantage. They combine traditional financial data with alternative data to get a complete picture of a company and make better investment decisions.
Source Alternative Data for Private Equity With udu
When using alternative data, private equity firms need to navigate a few challenges on their way to claiming returns. But if they leverage alternative data, they can make more informed investment decisions – and gain a significant competitive advantage.
So, what’s one of the best ways to get started? Leverage an AI-powered tool that can help your team sift through numerous data points to source the best deals; we call it udu.
udu is the ideal platform for deal sourcing and qualitative data harvesting. It uses patented technology to search and uncover hidden signals across the internet almost instantly. As a result, you can quickly and easily find the data your PE firm needs to make informed investment decisions – and generate that all-important alpha in the process.
Schedule a demo to learn more about how udu can help your private equity firm take its investment decisions to the next level.