Home / Private Equity / Private capital’s secret data driving savvy decision-making in secondaries market

The private markets juggernaut is one that has also thrown up a wealth of data that other players can use to sharpen up due diligence when making their own investment decisions – especially in the growing secondaries market.

Whether you view the twin pillars of private capital – equity and debt – as two sides of the same coin or two competing forces, it’s becoming apparent that as companies increasingly shun public markets in favour of private ones, the data sets these markets produce is growing in value.

The importance of that data is that it can be used in clever ways to fortify due diligence, according to Teiki Benveniste from Ares Wealth Management, especially in the booming secondaries market.

Speaking at The Inside Network’s Alternatives Symposium in The Hunter Valley, Benveniste (pictured) outlined how private markets have become a juggernaut in global economies as companies eschew the scrutiny and control forfeiture that comes with listing publicly. In the US, 87 per cent of companies with over $100 million in annual revenue are now private, and “the vast majority” of middle market companies with more than $10 million in revenue are also private.

“If you put all those companies together, they represent about a third of the US economy by output and a third of the employment, over 200,000 companies,” Benveniste said. “That’s a very large set of companies and potential data points. It’s a meaningful set of data points, because it’s such a big part of the US economy, yet it’s private.”

Being able to access that quality data, he said, can inform investors and help them do their job better. This is especially the case in the private equity secondaries market, where an investor buys into private equity sponsor portfolios or companies.

“If you’re doing your due diligence and you’re looking at those companies… your due diligence can go much deeper and you can get differentiated insights into portfolios and how they’ve performed over time,” he said.

“You can get to the bottom of how they’ve generated returns, if they’re able to generate alpha, and you can account for the timing of timing of deals and the timing of when those deals have come right.”

The right data can help ascertain whether a private markets player has demonstrated actual, repeatable skill, he said, which is crucial in the secondaries market when it comes to pricing. “You have to come up with a discount at which you want to trade, and what’s going to inform the input that price is [whether the] manager is able to generate the alpha that you need to hit your target return.”

This importance of this data supply is heightened by the rapid increase in the number of private markets providers on the market, added fellow speaker David Chan from MLC Asset Management.

“The choices are expanding rapidly,” Chan said, noting that in private equity alone there are a plethora of subsectors to choose from. “Everything from venture capitalism funds, primary funds, secondary funds, continuation vehicles, large cap, small cap, mid cap, you name it, there are different choices in private equity.”

Investment managers like MLC Asset Management are not only looking at the opportunities that present themself, he added, but the money that’s flowing into those deals and how it’s being managed. This is where the deep data private markets affords can come into play, as it can help investment teams better identify and appropriately allocate to specialist private capital purveyors.

“Something that we’ve looked at and noticed [as a] trend over the years is that having a diversified portfolio of specialists can generate better outcomes than just backing generalists,” Chan said. “The value creation playbook that these specialists are able to provide is one of the key reasons they can have repeatable value creation expert playbooks.”