Change and market uncertainty is the new norm. Creating market outlooks, investment projections and demand forecasts without incorporating external economic and industry data is no longer viable for planning success. It is time to end guesswork, bias, market blind spots and sticking fingers in the wind. It’s time to quantify market opportunity and volatility, and integrate data-driven economic predictions into planning cycles.
Intelligent Forecasting Quantifies Investment Predictions
We have found that there are 3 use cases for Intelligent Forecasting in the private equity industry. Please review our guide to Intelligent Forecasting for a background on the practice and process.
The use cases actually follow a logical sequence, from researching market and deal opportunities, to executing due diligence on prospective investments, to enabling portfolio companies with Intelligent Forecasting for strategic planning, risk mitigation and competitive advantage.
Use Case #1: Market Exploration – Deal Sourcing
Private equity firms are constantly and proactively seeking new investments. According to private equity industry analyst Prequin, North American private equity firms are currently sitting on around $1 trillion ‘dry powder’ in addition to approximately $3 trillion in AUM. Deal flow will be active over the next couple of years, no question.
PE deals are sourced through various methods such as research, internal analysis, networking, cold-calling executives of target companies, exploratory meetings, screening for certain criteria, conferences and conversations involving industry experts, and more.
Intelligent Forecasting is able to provide unique intelligence to support this process. The output takes the form of what is essentially an economic crystal ball, whether for a market segment or an individual company. At the deal sourcing stage, the following are typical steps:
- Select an industry and market segment (e.g. construction staffing in US)
- Identify leading indicators of business performance (e.g. via Prevedere’s external data repository and correlation engine)
- Create demand models 1-5 years into future (e.g. via Prevedere’s predictive modeling engine, ERIN)
An analyst will then have identified the leading business drivers and lead/lag indicators for a target market segment, as well as demand projections up to 5 years in the future. These projections are based on econometric data models, refined thru extensive machine learning, and validated by back testing. This data-driven approach to forecasting the health of an industry segment is invaluable for equity analysts (and also for investment bankers researching M&A deals).
Use Case #2: Due Diligence
In this phase of the private equity process, due diligence is conducted to form a better understanding of the target company. An operating model is typically created to help estimate the financial performance of the target firm. This gives the PE firm’s decision-makers a clearer picture of the major factors that drive return for the acquisition.
A key piece of the ROI is to forecast future business performance, whether sales, staffing levels, inventory, raw material cost, and other KPIs. Again, Intelligent Forecasting is able to provide intelligence for this phase of the PE deal cycle, in this case for an individual organization:
- Identify leading business drivers and correlated economic indicators of its business performance
- Create demand models 1-18 months, 1-5 years into future (e.g. via Prevedere’s predictive modeling engine, ERIN)
- Create forecasts for targeted KPIs, whether raw sales, year over year growth, market share etc
- Show how macroeconomic relationships and trends impact target organization future performance
We have generated demand projections and market outlooks for PE firms like Apollo, and this type of personalized economic intelligence has been critical to a successful diligence and bidding outcome.
Use Case #3: Create Advantage for Portfolio Companies
We see a couple of ways to leverage Intelligent Forecasting once a deal is complete. The PE firm’s portfolio managers can monitor the health of its portfolio companies’ markets, able to foresee headwinds and tailwinds and plan/advise accordingly. Intelligent Forecasting can also be leveraged by any and all portfolio companies, regardless of which industry they operate within. CEOS, CFOs, FP&A, S&OP and operational planners can create forecast models and outlooks to mitigate risk and maximize opportunity for their roles and functions:
- Improve forecast accuracy to drive strategic and operational decisions
- Understand market drivers, dynamics, trends and projections
- Insight into customer demographics, preferences and consumption drivers
- Predictions for cost management, e.g. future price of commodities
- Strategic intelligence for new market, location and category opportunities
- Market foresight to plan and execute months ahead of competition
Bottom line, Intelligent Forecasting helps PE firms and their portfolio companies make better investment and planning decisions by providing customized economic intelligence on their industry, their channels, and the demand for their products. By knowing all the factors that influence volatility and demand, investment professionals and portfolio companies can be better prepared for future risk and opportunity.
Please refer to our new eBook below for more information, and feel free to contact us anytime to explore this topic further.
- eBook – Intelligent Forecasting for Private Equity
For more in-depth information related to the above post, read our latest eBook.