Blue

Orange

How Firms are

blueorange.digital
Leveraging Data to
Solve their Biggest
Challenges
 How Firms are Leveraging Data to Solve their Biggest Challenges

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Two Ways Private Equity Firms
Contents

Can Maximize Portfolio Value

Without Hiring More Analysts
Leverage Points To Boost Private Equity 05
Investments

PE Leverage Point: Improve Deal Sourcing 07

PE Leverage Point: Improve Portfolio Company 09

Efficiency

2
02 Private Equity Problems

The Top Three Private Equity Problems Firms 12

Need To Solve

The Key Problems Private Equity Must Face 12

What Will Happen If You Ignore These Problems? 15

Identify New Deal Opportunities 16

03
Solutions To Private Equity
Problems Without Getting More
Capital
How Blue Orange Can Help With Data Science 21

Where To Go From Here 23

 How Firms are Leveraging Data to Solve their Biggest Challenges

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 How Firms are Leveraging Data to Solve their Biggest Challenges

Two Ways Private

Equity Firms Can
Maximize Portfolio
Value Without
Hiring More
Analysts

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4
 How Firms are Leveraging Data to Solve their Biggest Challenges

Leverage Points To Boost Private

Equity Investments

Two Ways Private Private equity is slow at adopting

new technology. According to a
Equity Firms Can report from the Wharton School:
Maximize Portfolio “when it comes to the world of
Value Without Hiring private equity it’s a different
More Analysts story, according to Sajjad Jaffer,
co-founder of the advisory and
investment firm Two Six Capital.
He said that when he and Ian
Picache started their analytics-
based firm in 2013, there had been
“no technological innovation in
5 private equity since the invention
of the Excel spreadsheet.”
In private equity, you’re playing
In private equity, you influence
a high risk and high reward the success and failure of your
game. Investors expect significant
returns compared to the public
markets. As a result, private equity
specialists need every advantage.
Simply hiring another quantitative
investment analyst is not enough.
Every PE firm is already doing
that. Instead, you need new
techniques to increase the value of
your portfolio companies.
 How Firms are Leveraging Data to Solve their Biggest Challenges

investments. Unlike investors in the public markets, you may have board seats
and the ability to influence management decisions. At the same time, you also
need to be thoughtful in how you exercise that influence. If you meddle too
much, you may frustrate your portfolio company CEOs and lose credibility in
the marketplace.

The solution to this tension? Focus on a few leverage points where your expert
judgment will produce the best results. Aside from those cases, step back and
let your companies operate.

1) Optimize your deal sourcing with data

2) Improve portfolio company operational efficiency

The first technique improves your returns by reducing the likelihood of

investment mistakes. The second technique helps you to increase returns by
improving operational performance. Let’s take a closer look at how Blue Orange
makes both of these wins possible.
 How Firms are Leveraging Data to Solve their Biggest Challenges

PE Leverage Point: Improve Deal Sourcing

In private equity, you face a difficult task to find attractive investment deals.
First, you have to find companies that fit your financial criteria in terms of
profitability, growth, and related criteria. Second, you need to find “blue ocean”
investment opportunities where you are not competing with other investors.
When you pursue hot companies with many other investors, the investment
price you have to pay tends to go up, and that makes it harder to achieve
significant returns. In contrast, sourcing a deal where you are the only investor
at the table means you will have improved flexibility.
 How Firms are Leveraging Data to Solve their Biggest Challenges

“Focus on a few leverage points where your expert

judgment will produce the best results. Aside from those
cases, step back and let your companies operate.”

• Gather Non-Financial Data. Most private equity transactions involve

private companies where there is limited public financial data. At the
deal sourcing stage, you need other data points to identify promising
data. Use data analytics to identify deals based on non-financial
data points such as growth and engagement trends in web traffic and
social media. While Internet engagement does not equate to revenue,
rapid growth in these metrics suggests that a company is successfully
attracting attention.

• Enable Peer Analysis. When you look at three different companies in

the cybersecurity software field, how do you evaluate them? Use data
analytics to review how end customers are discussing these products
8
(e.g., using sentiment analysis). Further in the deal process, you can use
analytics to compare business model differences (e.g. pricing, customer
lifetime value, and expenses).

• Refine Investment Models. Modeling future investment returns in

private equity is nothing new. Data analytics has a role to play in
helping you to improve the reliability of those projections. For instance,
a portfolio company projects 50% year over year revenue growth. How
do you know if that is a credible forecast? Use data analytics to conduct
a bottom-up financial forecast. If the company relies heavily on digital
marketing methods to quire leads and customers, it will be even easier
to develop these models.
 How Firms are Leveraging Data to Solve their Biggest Challenges

To take advantage of this leverage point, you will need to adjust your
methodology to consider new and unusual investment opportunities. Once
you have made an investment decision, some investors take a step back. That
hands-off approach is no longer good enough.

PE Leverage Point: Improve Portfolio Company Efficiency

When you invest in middle-market companies, they are unlikely to have

sophisticated analytics departments. They might have an analyst who works
with marketing data and one that works on financial analysis. However,
such relatively immature analytics functions tend to be backward-looking.
Reporting on past events is necessary, but it is not enough.

As an investor, you can supplement the analytics capability of portfolio

companies. Specifically, we suggest helping companies address problems
such as:
• Quality Improvement. When a company receives a large number of
9 customer support tickets, complaints, and other input, it is tough to
know what to improve first. Use analytics to summarize and clarify the
best ways to address customer needs. As a result, the company will
retain more customers by improving product quality.
• Sales and Marketing Analytics. Use analytics methods to drive down
the cost of acquiring new customers. What if the company does not
yet have a repeatable process to acquire customers. Data analytics
can help you design and measure different tactics until you find an
approach that resonates with your customers.
To deliver those capabilities, you don’t need to build your internal analytics
and consulting department. Instead, leverage Blue Orange Digital. We can
step in and help your portfolio companies to optimize their operations.
 How Firms are Leveraging Data to Solve their Biggest Challenges

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 How Firms are Leveraging Data to Solve their Biggest Challenges

PRIVATE EQUITY
PROBLEMS

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11
 How Firms are Leveraging Data to Solve their Biggest Challenges

The Top Three Private Equity

Problems Firms Need To Solve

It’s getting more challenging to

win in private equity. Investors
come to private equity firms for
unique opportunities and higher
PRIVATE EQUITY returns. Companies come to
private equity for funding when
PROBLEMS other funding options are not
suitable. To succeed, private
equity firms need to land a
steady stream of new investment
opportunities to meet investor
expectations.

12 The Key Problems Private Equity

Aenean quis aliquet mauris, Must Face
non suscipit mauris. Phasellus The days of small personal
malesuada ligula in est cursus networks dominating private
gravida. Praesent facilisis ante equity are over. According to
McKinsey research, there are
odio, sed molestie metus convallis 8,000 PE-backed companies in
in. Nunc volutpat dui quis blandit the USA in 2017 versus 4,000 in
blandit. Vestibulum ante ipsum 2006. In terms of private debt
fundraising, there were 139 funds
primis in faucibus orci luctus et in 2018, with an average fund
ultrices posuere cubilia Curae. size of $781 million. New firms
are hungry for deals to establish
themselves. Established firms can
no longer assume they will get
all of the investment deals they
need.
 How Firms are Leveraging Data to Solve their Biggest Challenges

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1) High levels of competition from other private equity firms

When a growing company seeks funding to grow, they have no shortage of
options. At the small end of the spectrum, the rise of angel investor websites
like AngelList make it easy to obtain small amounts. At the larger end of the deal
spectrum, there are hundreds of firms sitting on large amounts of capital. Add
up these challenges and it is no surprise that a growing number of PE firms are
sitting on their capital.
Consulting firm EY recently summarized the state of the PE market in these terms:
“many players chasing too few deals.” Private equity firms have more than $600
billion in capital sitting on their books as of early 2019. As more and more capital
sits on the sidelines, return on assets and other financial metrics will start to
decline.
 How Firms are Leveraging Data to Solve their Biggest Challenges
2) Difficulty carrying out due
diligence processes
Invest in the wrong company, and
you will suffer terrible returns and
reputational damage. Imagine if you
were an investor in Theranos, the
failed health technology company that
raised $700 million from investors.
In private equity, your judgment in
selecting investment deals matters.
If you are associated with a CEO who
ends up facing criminal charges, your
investors will ask you tough questions.
You cannot eliminate investment
uncertainty in private equity. However,
you can take steps to reduce the most
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common problems with due diligence.
On the other hand, private equity
firms are under pressure to complete
their due diligence process as quickly
as possible to close a deal.
3) Difficulty in locating suitable
investment opportunities
Information is king in private
equity. If you rely on public sources
like TechCrunch to find promising
companies, you will continuously face
deal competition. When your firm
competes against other investors, you
are going to make hard choices. For
example, you might not get the board
seats you want. Or you might have to
agree to a different valuation. In some
hot deals, you might have to accept a
smaller allocation than you desire.
 How Firms are Leveraging Data to Solve their Biggest Challenges

What Will Happen If You Ignore These

Problems?

Failing to deliver strong returns to

your investors means you will face
difficult conversations. You may have
to take on higher risk deals to meet
your returns. Or you may have to
pause your plans to raise additional
capital while you regroup. Such a
move may send unintentional signals
to the marketplace that your fund is
struggling. Taking on more risk and
pressuring portfolio companies for
better deal terms are not the only
15 ways to improve returns.

Use Data Strategy To Improve Your

Returns

Every private equity firm wants to

claim that they are smarter than the
competition. If you’re serious about
making that claim, you can’t merely
point to the number of PhDs you
have on staff. Instead, you need to
differentiate your PE firm based on
data expertise. There are three ways
private equity firms can deploy data
skills to improve returns.
 How Firms are Leveraging Data to Solve their Biggest Challenges

Identify New Deal Opportunities

Your ability to locate highly promising investment deals before anybody
else is a critical way to build your reputation. In addition to relying on
your networks, create your database to identify new strategies. Here is
a simple illustration to show how to use data to determine investment
opportunities:
• Investment Hypothesis. You start with a tested idea, such as that
computer science departments at certain institutions (e.g., Carnegie
Mellon and Stanford) tend to produce high potential founders.
• Data Source. You use data on company founders from Crunchbase
and other sources to build a database of founders who share the
patterns you identify above.
• Data Analysis. Use data analytics to identify other patterns behind
high growth companies like activity at conferences.
• Deal Identification. Generate a list of high potential early-stage
16 companies to approach. If you are the first or second investor in a
company, you are more likely to land favorable investment terms.

Not sure how data analytics can help you identify deal opportunities?
Reach out to Blue Orange to discuss the options.

Reduce Investment Mistakes: Optimize The Due Diligence Process

Warren Buffet’s first rule of investment success is: never lose money.

All investment decisions come with risk. However, you can use data
insights to avoid mistakes. Consider the example of meeting a charismatic
company founder. Their pitch may impress you so much that you want
to charge ahead on the deal. Use a data-based balanced scorecard as a
counterweight on the deal. Specifically, you can use data tools to effectively
challenge a founder’s estimates of their company growth rates and overall
market size.
 How Firms are Leveraging Data to Solve their Biggest Challenges

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All investment decisions

come with risk. However, you
can use data insights to avoid
mistakes.
 How Firms are Leveraging Data to Solve their Biggest Challenges

Solutions To
Private Equity
Problems Without
Getting More
Capital

03
18
 How Firms are Leveraging Data to Solve their Biggest Challenges

Solutions To Private
Equity Problems
Without Getting
More Capital

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 How Firms are Leveraging Data to Solve their Biggest Challenges

How do you grow your private

equity firm without going
back to investors to raise
more capital? After all, it is
not always possible to raise
more capital. You might have
your hands full with your
current portfolio. Or you might
have recently completed a
fundraising process. Now, your
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investors expect you to deliver
results.

That’s the problem we hear from the private equity community: how to
deliver improved performance with a lean operation. They don’t have the
same infrastructure as the Fortune 1000. Yet, you are expected to provide
investment returns far exceeding the S&P 500 to make up for the fact that
PE funds have higher risk and lower liquidity.
To help PE firms improve their performance, you need better insights.
That’s why Blue Orange has developed a series of proprietary solutions for
private equity. These solutions bring a new perspective and way of working,
but you don’t need to get more capital.
 How Firms are Leveraging Data to Solve their Biggest Challenges
How Blue Orange Can Help With
Data Science
1) Risk Management
Private equity investors face elevated
risk with their investments. Sure, you
can reduce some risk by taking a
board seat and using a rigorous due
diligence process. However, those
processes still mean you are several
steps removed from daily operations.
To get a closer read on risk in your
portfolio, use data science.
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Specifically, we suggest using data
science models to address financial
risk and non-financial risk. In financial
risk, you can model whether the
firm’s financial projections are based
on reasonable assumptions. In non-
financial risk, you can develop models
to compare different products in a
category. This type of comparative
analysis will help you effectively
challenge management projections.
By completing your risk assessment,
you will be able to develop more
accurate investment return models.
2) Talent Aquisition
There are two ways to apply data-
based talent acquisition as a private
equity firm. First, you can apply
this strategy to your recruitment of
associates, managers and other firm
employees. Second, you can offer this
capability to your portfolio companies
so that they can improve their hiring.
Unless your private equity firm is
currently expanding headcount, you
will likely get more benefit by offering
this service to your companies. For
example, if you are working with
startups, the founders may have
limited experience with hiring.
Specifically, they may not know what
to look for in terms of “red flags” for
problems.
It’s wise to be careful about using
data in hiring. If you lack expertise in
this area, you can end up like Amazon
which used a data-based hiring
methodology. Unfortunately, that
approach emphasized discriminatory
patterns from past hiring decisions
like systematically undervaluing
female job candidates.
 How Firms are Leveraging Data to Solve their Biggest Challenges

Reuters put the issue this way: “by 2015, the company realized its new system
was not rating candidates for software developer jobs and other technical
posts in a gender-neutral way. That is because Amazon’s computer models
were trained to vet applicants by observing patterns in resumes submitted to
the company over a 10-year period. Most came from men, a reflection of male
dominance across the tech industry.”

3) Automated Deal Sourcing

In private equity, you are only as good as your last investment deal. If the
pipeline for deals dries up, deploying your “dry powder” (i.e., unallocated
capital) becomes much more difficult. That’s why we recommend using data
science to automate your deal sourcing.

For example, think of all of your previous contacts. You may have met with a
founder two years ago and passed on their company. However, that same team
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now has a promising idea. Systematically monitoring your professional network
for investment worthy deals can become exhausting. Therefore, consider using
automation tools for LinkedIn and your customer relationship management
(CRM) system to find more deals.

Once you are fully exploiting your current network and follow up processes,
you can take the next step in automated deal sourcing. With this approach,
you collect data from public sources (e.g., Venture Beat, social media) and
private sources. Next, you filter and score those results to identify promising
companies. At this point, you reach out to the companies to gather information
and discuss the next steps.
 How Firms are Leveraging Data to Solve their Biggest Challenges

4) Portfolio Company Process Optimization

Your portfolio companies are likely already successful to some degree by

having innovative technology or products. However, your companies may be
underperforming financially and operationally because they have process
weaknesses. For example, a medical device company may struggle to obtain
timely regulatory approvals because of record-keeping process gaps.
By offering data science as a service to your portfolio companies, you will
improve their performance. When a portfolio company becomes more
profitable, your investment results will improve as well.

Where To Go From Here

Shifting your data analysis from siloed databases to unified and transparent
cloud environments is something new and unfamiliar. Recruiting and
developing a data science department would take years. Instead, reach out to
23 Blue Orange Digital to build cost effective, scalable architecture that can bring
advanced analytics and automation to your firm within a quarter.

For guidance on optimizing your due diligence processes without compromising

on quality, contact Blue Orange for a free data capability assessment.
 How Firms are Leveraging Data to Solve their Biggest Challenges

Blue Orange is a data science, machine

learning, and data visualization firm.
We work with businesses to implement
24 data-driven analytic techniques derived
from statistical modeling and data
science. We are a team of passionate
data engineers, PhDs, data scientists,
and visualization experts.
Complex Data, Simple
Solutions

Blue
Blue Orange Digital
530-454-5830

Orange contact@blueorange.digital
www.blueorange.digital