Alternative Data Sources for Private Market Investment Decisions: Unlocking New Insights

In the rapidly evolving landscape of private market investing, traditional data sources are no longer sufficient to gain a competitive advantage. Investors are increasingly turning to alternative data to enhance decision-making processes, uncover hidden opportunities, and manage risks more effectively

The Emergence of Alternative Data in Private Markets

Alternative data refers to non-traditional information collected from various sources such as satellite imagery, social media activity, credit card transactions, weather patterns, and other types of data that provide valuable insights into consumer behavior and market trends. Private equity firms are significantly investing in alternative data providers, spending an average of $1 to $5 million annually.¹ In 2023, it was reported that 80% of firms have increased their budgets for alternative data platforms compared to prior years as they continue to find new and valuable ways to leverage this data.²

According to Deloitte, the global market for alternative data providers is expected to reach $137 billion, growing at a compound annual growth rate (CAGR) of 53% over the next seven years.² This explosive growth emphasizes the importance of integrating alternative data into investment strategies to remain competitive.

Types of Alternative Data Sources

1. Credit Card Transactions

Aggregated and anonymized credit card data can reveal consumer spending patterns, helping investors gauge a company's financial performance before official reports are released. For instance, analyzing credit card transactions can help identify increasing consumer interest in specific sectors or products.³

2. Satellite Imagery

Satellite images can monitor physical assets like real estate developments, agricultural outputs, and infrastructure projects. Tracking the construction progress of a commercial property can provide real-time insights into project timelines. Investors can use this data to assess the growth of retail chains by observing parking lot usage or store expansions.

3. Social Media Activity

Analysis of social media trends and online consumer behavior can reveal market sentiment and emerging trends. Platforms like Twitter and LinkedIn offer data that can gauge public perception of a company or industry. Social media data is full of consumer sentiment and behavior trends, helping investors understand public conversations about specific companies or sectors.

4. Geolocation and Climate Data

Geolocation data from mobile devices can provide insights into foot traffic for retail locations, while climate data can impact investments in agriculture or energy sectors. For example, increased foot traffic data might indicate higher sales potential for retailers.

5. Web Traffic and App Usage

Monitoring website visits and mobile app engagement can indicate a company's customer reach and growth potential. Increased web traffic might correlate with higher sales or market interest. Firms can analyze web traffic data alongside other datasets to identify companies showing particular promise.

Integrating Alternative Data into Investment Decisions

1. Developing Analytical Capabilities

   • Invest in Technology and Talent: Utilize advanced data analytics and machine learning techniques to extract insights from large and complex datasets. Firms are investing in in-house data analytics teams capable of customizing data solutions to gain insights into specific markets, industries, and companies.

   • Leverage External Resources: Some firms partner with alternative data providers that offer a wide range of non-traditional data sources and analytical capabilities.

2. Ensuring Data Quality and Compliance

   • Data Validation: Verify the accuracy and reliability of data sources to avoid erroneous conclusions. Firms should assess the quality and level of bias of data based on its accuracy, longevity, representativeness, backward compatibility, uniqueness, and breadth of adoption.

   • Regulatory Compliance: Adhere to data privacy laws and regulations to ensure ethical use of data, avoiding risks related to material non-public information (MNPI) and personally identifiable information (PII). Regulatory compliance often requires firms to have written policies and procedures designed to address the potential risk of receipt and use of MNPI through alternative data.

3. Combining Traditional and Alternative Data

   • Holistic Analysis: Integrate alternative data with traditional financial metrics to create a comprehensive view of potential investments. This approach provides valuable information on competitor performance and customer characteristics, enhancing due diligence.

   • Enhanced Due Diligence: Use alternative data to supplement due diligence processes, uncovering risks and opportunities that may not be evident through standard analysis.

4. Risk Management

   • Real-Time Monitoring: Alternative data can provide timely alerts to emerging risks, allowing for proactive management.

   • Scenario Analysis: Utilize data to model various market conditions and their potential impact on investments.

Challenges and Considerations

1. Data Overload

With a vast array of alternative data providers on the market, it can be challenging to determine which will have the most impact on a firm's investment strategy. Prioritizing relevant data sources and focusing on actionable insights is crucial.

2. Cost Considerations

Acquiring and processing alternative data can be expensive. Private equity firms spend an average of $1 to $5 million annually on alternative data providers.¹ Ensuring that the pricing is in line with industry standards per seat and that the data purchased is the right product for investment research is vital.

3. Ethical and Regulatory Concerns

The use of certain data sources may raise ethical questions regarding privacy and consent. Firms must ensure that data is sourced and used ethically and responsibly, adhering to evolving regulations.

The Future of Alternative Data in Private Markets

As technology continues to advance, the use of alternative data is expected to become even more integral to private market investing. Innovations such as artificial intelligence (AI) and machine learning are unlocking new data sources and analytical methods. State-of-the-art large language models (LLMs) can extract meaningful insights from previously unattainable input sizes, enabling more sophisticated analysis.

According to Deloitte, the global market for alternative data providers is expected to reach $137 billion, growing at a CAGR of 53% over the next seven years.² This growth underscores the increasing recognition of alternative data's value in generating alpha and managing risks.

Conclusion

Alternative data sources offer private market investors powerful tools to enhance investment decisions. By harnessing non-traditional data, investors can gain unique insights, stay ahead of market trends, and make more informed decisions. However, successfully integrating alternative data requires careful consideration of analytical capabilities, data quality, regulatory compliance, and ethical standards.

Key Takeaways for Investors

• Invest in Technology and Expertise: Building the necessary infrastructure and hiring skilled professionals are critical steps.

• Prioritize Data Relevance and Quality: Focus on data sources that provide the most significant insights for your investment strategy, ensuring they align with your firm's objectives.

• Integrate with Traditional Analysis: Use alternative data to complement, not replace, traditional investment analysis, creating a more comprehensive view of potential investments.

• Stay Informed on Regulatory Changes: Ensure that data usage complies with evolving laws and regulations to mitigate risks related to MNPI and PII.

By embracing alternative data thoughtfully, private market investors can gain a competitive edge and drive better investment outcomes in an increasingly complex and data-rich environment.

Quick Hits:

• Private equity’s ‘layered leverage’ needs more scrutiny, says PGIM chief

• Wall Street forms super teams to fight for $1.7 trillion private credit market

• Should private market ETFs be available to the public? One former SEC regulator has concerns.
  

Follow Us:

𝕏: https://x.com/BuysideJournal

Instagram: https://www.instagram.com/buysidejournal/

LinkedIn: https://www.linkedin.com/company/the-buyside-journal/

_{1. Concertiv. (2023). Alternative Data Providers and Their Impact for Private Equity Firms.} 

_{2. Harvard Business Review. (2024). External Data and AI Are Making Each Other More Valuable.}

_{3. Deloitte. (2023). Alternative data at investment management firms: From discovery to integration.}

_{The content herein is solely for informational purposes and should not be viewed as investment or any other advice or a current or past recommendation, or an offer to sell or the solicitation to buy securities or adopt any investment strategy. Certain of this material has been generated by an artificial intelligence language model, ChatGPT, which has been prompted to provide topical finance-related articles. The articles herein may not reflect the most current news, events, or developments. While we strive for accuracy, there may be limitations, inaccuracies, or biases present, and The Buyside Journal (including, for the avoidance of doubt, its affiliates) assumes no liability for the content herein and does not guarantee the accuracy, adequacy or completeness of such information (and does not undertake any duty to correct or update such information). Readers are encouraged to independently verify the information herein and consult with professionals for specific advice or information. Predictions, opinions, and other information contained herein are subject to change continually and without notice of any kind and to the extent accurate initially may no longer be true after the date indicated. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Actual results could differ materially from those anticipated in forward-looking statements.}