“A data-driven approach is a valuable built-in asset you can add to a company. Almost by definition it improves the valuation of that company, hence producing alpha for the PE firm.” - Greg Brown, Business Intelligence Consultant, Blue Margin

Most investment strategies include a goal of generating alpha, or investment returns in excess of the benchmark rate. Because of this, alpha is known by many as the holy grail of investing (Chen, 2022). However, “since the 2007-2008 financial crisis, it has become increasingly difficult to generate alpha based on traditional investment styles and strategies” (Dow Jones, 2021).  

Using Business Intelligence to Find Alpha 

In this episode of The Dashboard Effect, CEO Brick Thompson and consultant Greg Brown discuss how business intelligence (BI) can help private equity firms find and generate alpha in their portfolio company investments and obtain an edge over the competition. Dow Jones agrees with such data strategies indicating, “Technology and advanced business intelligence tools have created new opportunities for organizations to rapidly gain insight and create opportunities” (Dow Jones, 2021).  

Three ways BI helps generate alpha: 

  • Supporting the planning and execution of new innovations. With BI, real-time insights make innovative approaches easier to monitor and more likely to succeed. 
  • Improving visibility into finance and operations (e.g., activity-based costing, order to cash, or labor utilization), so leaders can address issues based on real-time insight to increase profit margins.  
  • Raising the valuation multiple upon exit. In addition to illustrating the story of future revenue growth for investors, data-driven companies receive higher valuation because they are easier to manage.

Per Adam Coffey, 3-time PE-backed CEO, “A company that has good visibility into data and analytics is going to be perceived to be a better company than one that does not. It’s going to trade for higher in the multiple range.” (Read or watch our full interview with Adam.)

To learn more, listen to the full episode, How to Find Alpha.