Two Six Capital co-founder Sajjad Jaffer jokes that that last major technological innovation in private equity was the launch of the Excel spreadsheet.
Six years later, Two Six Capital has been involved in over $27 billion worth of closed private equity transactions and is now a force in “the next wave of data-powered investing.”
Here is an excerpt from a report on analytics and private equity published by Wharton:
What Two Six Capital does, Jaffer said, is understand and project a portfolio company’s revenue. There are two facets to this: transaction due diligence, or “understanding a business from the bottom up,” and value creation post-investment, which Jaffer characterizes as yielding “board-level insights … understanding how a portfolio company performs and then driving operational improvements.”
While other investment firms have similar goals, Two Six Capital’s self-described secret sauce is technology. “Using large-scale, cloud-based engineering we can handle very, very large data sets in very, very short timeframes. Billions of rows of data,” Picache said. He noted that their in-depth methods enable them to view “what is going on in a business in a minute-by-minute, day-to-day basis.” He compared this continual monitoring to trying to lose weight: If you really want to see results, you need to step on the scale every day.
He talked about the difficulty — for any investment firm — of accurately predicting a portfolio company’s growth, and how data analytics can change the game. “Right now in the industry, when most associates at a private equity firm go to sell [a company], they [just] put ‘12%’ in there. It is a relatively finger-in-the air approach,” he said. “But we — because we count every customer, every transaction — get a much more granular perspective.”
Two Six Capital uses about 28 standardized analyses and 18 statistical machine learning models to understand data, according to Picache. These tools are like paint colors that enable the company to create a picture of a business, he said. “We can figure out … is this business doing well [or] badly? Are there opportunities to change things?”
They come to their conclusions fast, Jaffer said, asserting that speed is one of Two Six’s competitive advantages. “In commercial diligence you’ve got four to six weeks to make a go/no-go decision on the deal. [We can] take in large volumes of data, and quickly come up with a point of view on [the question], ‘Is this company going to make returns — yes or no?’”