With a decade and a half of experience investing in technology and services companies, Ankit Kumar has made a name for himself as one of San Francisco’s most sought after private equity investors. His success has been widely recognized in the private equity industry and the broader business community.
Born and raised in India, Mr. Kumar moved to the United States to attend Stanford University, and later the University of Pennsylvania’s Wharton School. His first job post-graduate school was as a management consultant for technology companies. In this role, he thrived, as he combined his background in engineering with his love for business, and helped a number of Silicon Valley technology companies with their mergers and acquisition activities. After a brief stint as an investment banker, he joined the private equity industry, where Mr. Kumar has served as an investor, board director, and interim executive for several successful companies.
We sat down with Ankit to get his perspectives on how the private equity industry has changed over the last decade.
According to Ankit, “The consistent theme has been the maturation of private equity as an asset class.”
As private equity remains one of the few remaining investment niches which can still provide attractive risk-adjusted returns, there continues to be a massive influx of new capital into private equity funds. However, Ankit believes, this new capital in turn drives intense competition for deals, which has led to the need for private equity firms to evolve and innovate.
“Two decades ago, you could be really successful as a private equity investor if you had the investment banker network to source deals, and were disciplined in the prices you paid for companies. That is definitely not the case today. You need to have a real edge.”
One of the key innovations, the private equity industry has made during the last decade, has been a focus on operational value creation.
“One approach which has been very successful, is to identify three to four very specific operational changes you can make to the business, which you as an investor have the unique ability to identify and execute.”
According to Ankit, this approach provides an investor the ability to underwrite an investment better than others and as a result, both pay the highest price for an asset and generate solid returns.
“You are essentially putting yourself in a position to not only value the company more accurately than everyone else, but also fundamentally change the intrinsic value of the business.”
However, as a focus on operational value creation becomes mainstream, Ankit believes private equity firms need to find new ways to differentiate themselves.
“Similar to our portfolio companies across every industry, we as private equity investors need to adopt technologies such as big data analytics and machine learning to gain an edge in the marketplace.”
According to Ankit, there are 5 main ways in which he utilizes big data analytics and machine learning in his investment approach.
- Technology helps identify the right companies to invest in. Twenty years ago, deal sourcing was done exclusively through networking. Now, this process has become more data-based. For example, if Ankit is interested in investing in a particular industry, he can build a list of companies that are part of that industry using sources such as websites, conference lists, and trade associations. Using software, he can then append this list with information from public sources, such as LinkedIn and press releases, and proprietary datasets to get more insight into companies on the list. Armed with this data set, Ankit now has a full picture of the investment opportunity set which enables him to narrow down which companies to evaluate more deeply.
- Data guides the “how and when” to approach a company. By using big-data analytics and machine learning, Ankit is privy to certain signals, such as rapid employee growth at a company or new patent approvals. He is now better equipped to assess the companies that may be looking for external money or who may need capital to grow. Data can also provide helpful insights into the common connections between an investor and company management, which may reveal a helpful connection who can provide an introduction.
- Data informs the ways a company can improve. There are countless examples of ways in which data can help identify ways to grow a company. Ankit often uses technology to analyze the millions of transactions in the records of the companies he is looking to invest in. “This can provide tremendous insights and very specific strategies to grow the business.” For example, in one of his investments, by analyzing growth and profitability for thousands of SKUs, Ankit identified opportunities to increase prices as well as simplify the product line-up. In another instance, he identified massive synergies during the merger of two logistics companies where each company had better costs on certain routes than the other company.
- Data and technology reduce investment risk. Analyzing the data is one of the best ways an investor can reduce risk. Through the use of customer level data, investors can assess how stable the company’s relationship is with their customers. They can see how customers are behaving, how revenue has increased throughout the years, and assess a company’s ability to retain their customers. According to Ankit, “In one instance, such an analysis, revealed to us that there was very high recurring revenue from existing customers, even though that was not the nature of contractual relationships with customers.”
- Technology enables scaling of private equity firms. “We are increasingly using big data analytics and machine learning technologies to make fundraising and the back-office more efficient.” Ankit commented. As the industry grows, the limited partners which invest in private equity funds are becoming more diverse, and technology is becoming a key enabler of matching funds with these limited partners. In addition, a lot of repetitive tasks in the back-office, such as fund subscriptions, capital calls and distributions, and investor reporting can be automated using big data analytics and machine learning.
According to Ankit Kumar, “This is only the beginning. Technology is the future of private equity investing.” To learn more about Ankit Kumar, visit his LinkedIn.
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