Private equity has long been an industry reliant on middlemen. Investors source deals through networks of business connections, turning to investment bankers, brokers, attorneys, and business connections for introductions to high-potential companies and founders. This approach works well enough, albeit at cost; given that investors often have to compete at auctions to win a deal, they rarely pay bargain prices for the deals they are shown. Even when private equity organizations are proactive in tapping their network for leads, their methods are inherently reactive, with action hinging on whether third parties can provide useful information and facilitate productive connections. For newer firms that lack the trust and well-developed networks of their long-established peers, accessing those middlemen — and the crucial market intelligence they hold — can be frustratingly difficult.
But what if private equity organizations could source deals without relying on brokers and networks? What if, instead, they could distill massive amounts of publicly-available information into solid leads, develop data-driven insights into what consumers are interested in, and then circumvent the middleman by reaching out to high-potential founders directly?
With modern technology, this hypothetical isn’t all that far out of reach. Take the natural language processing tool Quid as an example. Quid’s innovative data handling tools allow it to intake massive volumes of text from a variety of sources — news pieces, social media platforms, etc. — and translate it into visual, interactive maps that offer insights into relationships and ideas that were previously hidden by the sheer volume of information. As the company’s marketing materials describe, Quid’s tools can “reveal the why behind the what,” and offer a glimpse into the “connections, trends, and insights that will help you understand the story behind your customers, competitors, markets, and your own brand.”
Ideally, a private equity firm could use a service like Quid to both better understand market trends and create strong leads. The latter outcome isn’t as overly ambitious as it might seem at a glance. Bloomberg, for example, asked Quid to write a list of the “50 Most Promising Startups You’ve Never Heard Of” twice — first in 2009, when it was branded as YouNoodle, and for a second time in 2017. The news agency’s consensus on Quid’s work is near-overwhelmingly positive; while the 2009 list did name a few companies that either shuttered or lost value, it also included several standout hits. To quote one Bloomberg writer on the matter: “If YouNoodle’s list had been a venture portfolio, it would have been one of the best-performing funds of the last two decades.”
The idea of applying data aggregators and natural language processing tools to private equity isn’t all that new. Nearly a decade ago, one group of researchers forecasted that internet data gathering would be all but a given as more tech-savvy millennials achieved leadership roles in the private equity sector. Moreover, they found that the shift to publicly-available information — as opposed to confidential, broker-exclusive deal sourcing — would have a positive impact on the industry, noting that “increased deal flow and brand recognition offsets any loss of confidentiality.” These findings are promising, although one does wonder if a private equity firm’s ability to source deals and note trends themselves rather than relying on a middleman is in itself a more “private” and “confidential” methodology.
Quid is not the only tool on the market that promises to upend private equity conventions. Integrated data platforms and business intelligence platforms have come out in droves over the last few years. Oracle, for example, rolled out its collaboration tool for building blockchain distributed ledger business networks in 2016, while IBM’s Watson IoT platform began providing companies with the means to conduct cryptographically-hashed and shared blockchain ledgers in 2018. Both offer a host of benefits, including increasing trust between devices, lowering the risk of tampering, facilitating speedier collaborations, and reducing costs by removing the need for expensive middlemen.
The potential implications of these tools — and, of course, those like Quid — could help investors source deals faster and more accurately, as well as support the day-to-day tasks of managing, monitoring, and reporting private equity assets. Industry adoption has already begun; in February of 2017, the Illinois-headquartered private equity firm Northern Trust made national headlines by integrating a blockchain-based transaction recording system. It was the first large-scale, commercial deployment of the technology and established a trend of adoption that we will undoubtedly continue to see in the future.
Technology tools like IBM’s Watson, Quid, and Oracle’s smart contract technology promise not only to be useful, but also to revolutionize deal sourcing methodology and operations in private equity. It will be interesting to see where the trend takes us.