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Tim Friedman is the founder of PE Stack where he guides GPs, LPs and service providers in the private equity space identify, assess and select specialized technology for their data management needs. On this episode of Data Disruption, Tim outlines everything private market investors need to know in order to have a successful data technology adoption. From gaining momentum in the buy-in process to successful implementation.
Podcast Transcript
Kali Jakobi
Hey everyone. It’s Kali from Mercatus and today I’m joined by the founder of PE Stack, Tim Friedman. Tim has an extensive background helping GPs, LPs and service providers in the private equity and VC space, identify assets and select specialized technology for their data management needs. Tim, welcome to the show.
Tim Friedman
Nice to be here Kali. Thanks a lot for having me.
Kali Jakobi
So Tim, we hear a lot about champions at investment firms who struggled to gain internal buy-in or budget during the end of a technology bind cycle. What best practices would you suggest for these internal champions to alleviate friction when selecting and moving forward with their data management technology?
Tim Friedman
Well, there are certain steps they should take before they get to the budget approval process. First, the bias should really include all the stakeholders in a thorough fact finding process to determine where the inefficiencies are in data management. Following on from that they should educate themselves on the potential solutions, understand exactly how each one could alleviate the challenges that they’re facing. Once that’s done the fund managers will need to determine what value can be derived from the solutions in question, both in terms of the money saved and as well as potential revenue gains, then build a framework around the cost of the technology as an investment. Once you’ve done that and getting by should not really besides managing and you can share your thorough assessment of your problems and the Bible solutions and show your expected return from the investment in the new platform.
Kali Jakobi
So for a private investor who is seeking to adopt new technology to help manage their data, where should they start?
Tim Friedman
So I’d say the first thing is that we get a lot of misconceptions when it comes to what is actually available as far as technology goes. And one of the most interesting things about how this market has progressed when it comes to data management within the private equity and private capital arena over the past, say 10, 15 years is that 15 years ago, there really wasn’t anything, right? And now there are a ton of different solutions and lots of different approaches towards solving some of the data management analysis and reporting issues that firms face. And so I really think the first thing is to try and understand what technologies actually exist and not go in with any preconceived notions of I need this, I need that. I think the best thing to do is to really start and say, look, what are the actual issues that I have? What are the inefficiencies? What are the opportunities? What potentially could I actually be achieving? And I think that’s where speaking with experts who live and breathe this world on a daily basis can really come in and provide some value. You really want to try and go in and work with people that understand what solution success as far as technology, as far as the different approaches and the pros and cons and relative expenses of the various different approaches towards the data management piece.
Kali Jakobi
So as they’re making those evaluations and trying to figure out what is even available for them, how are fund managers able to determine the value from any given solution? What is the process for really quantifying that?
Tim Friedman
I’d say that the first thing that you really want to do is really assemble the key stakeholders first and try and get the right people involved in putting together a spec for what really the search is going to entail. That way you get to really understand where the potential is for adding value and gaining efficiencies. And one of the biggest problems that we have when we’re assisting with procurement processes has been that halfway through a process, you’ll get someone new coming in, they have different requirements, they’ve not been understood from the outset. And so I think it’s really important that when you are embarking on this approach and specifically the technology, it could be, right well, we’re talking with the deals team and a financial analysis team, but actually the IR team might also want to use this solution and gain value from it.
Tim Friedman
And so it’s important to get them involved and look at all the various different processes from the outset. As far as how you can put a value on these things, I’d say, first of all, you really want to try and understand how much time you are spending looking at the various different tasks that you’re currently engaged in. There are a lot of inefficiencies that come from using say Excel based analytics, there are definitely inefficiencies that come with some of the manual data ingestion processes that we see as far as just getting data into a platform in the first place, that can be a major headache. And so if you’re able to quantify, first of all, the amount of time that you are spending on the certain tasks that you are looking to digitize, then you can really think, well, okay, so we’re spending this amount of time, you know how much that time is costing you as far as what that costs, as far as resources for personnel go.
Tim Friedman
And then you can really think about right, well with the right solution in place, what kind of time-saving efficiencies I’m I able to gather here, and you can really start to put a value on that time save and suddenly that’s one of the big benefits as far as, and it’s not a question of, Hey, I can fire a few people now and save some money, right? That’s not really the objective and sometimes people get a little bit worried when we talk about the efficiencies. It’s really freeing up people’s time to do more valuable things and put them into more valuable… So if we’re looking at say portfolio analysts, rather than spending time making sure that the data inside an Excel model is accurate and spending the time filling that data in, they can their time on performing more analytics, more analysis and doing more. It might be sourcing more deals and freeing up people’s time to do more valuable, less menial tasks and frankly, just keeping employees a little bit happier because oftentimes the tasks that you’re looking to digitize are the ones that are probably the least favorite things that some of these highly paid people are being made to do.
Tim Friedman
So I think that’s the first thing is really just thinking about the efficiency gains. And then you’re thinking about, right so what opportunities is this going to afford me that I’m not currently doing? And so as an example of one that we recently worked on here, we were working with a firm and they were really interested in conducting scenario planning based on various different market conditions. And so this is an exercise that they were doing as a one-off because it involved going through and modeling multiple different portfolio companies and different Excel spreadsheets. And it was a very arduous task fraught with the risk of making errors. By putting in place a platform, they were able to digitize that process to the point where they were changing variables.
Tim Friedman
The platform was crunching these numbers behind the scenes and then delivering the results back into the platform. And so now they’re able to conduct scenario analysis on the fly. They could be in a business meeting and say, “All right, what’s going to happen if the price of oil drops by this amount, or if the S&P rises by this amount?” Or what other variables are going into their model of revenue increases, whatever it might be and then bang, they can see the effects of these things, both on an individual portfolio company level and then also on the fund level. These are the opportunities that you are going to get if you have set up a platform properly and considered the various different value adds that these platforms can bring. And there’s significant value in being able to produce this analysis and do these additional tasks which you weren’t able to do before. So I think it’s just thinking about what are the opportunities, and what’s the value of those opportunities alongside what efficiencies can be gained.
Kali Jakobi
Great explanation in terms of the opportunities and efficiencies at play here. But with all of those opportunities, there’s always a price tag. So let’s dive into a little bit about pricing. I know there’s a really wide range of pricing for technology solutions, but there’s also a huge cost for doing nothing. How should a fund manager assess this part of the process and evaluating what’s right for them?
Tim Friedman
So I think first of all, when we’re talking about pricing and some of the pricing considerations, I think that one thing I would urge certainly fund managers to consider when they’re thinking about, okay, I have my Excel process. I don’t love it, but it’s working, I’d say that today’s LPs are becoming way more sophisticated and way more demanding, not just as far as they might be asking for data and an IR team should be able to deliver that to them, and we’ve seen a lot of that during COVID where there are ad hoc requests for additional information, and some IR teams have struggled to deliver that given some of these more old school methods for data management. But beyond that, I feel like on an operational due diligence perspective or from the operational due diligence perspective, there will be a cost as far as certain LP investors are now going to be looking at what technology you have in place for data management when it comes to how you’re running a business. And so the cost of not having certain technologies in place, given the increasing sophistication of the LP universe that is considering investing in funds, that you could find it hurting your ability to raise capital in a real way.
Tim Friedman
So that’s the first thing I would say, just as far as a cost of doing nothing. The cost of doing nothing may be higher than people than assume. But then as far as pricing goes, it can be a challenge. It can definitely be a challenge when we’re thinking about the relative pricing between platforms. And so just pricing as a concept as far as how do you judge the pricing of say an individual platform rather than the cross-comparison, which we can come to in a second, when we’re talking about the individual platform, it really is a question of, well, I might have an idea having gone through the initial exercise of what my expectations are and what the value is of the time saved and the new opportunities and if I can put a monetary value on that, then I can judge the cost of buying the platform from the perspective of I expect to get a return from the investment that I’m making on this technology, and that should be a meaningful return and then you’ve got something to judge the cost.
Tim Friedman
So that’s the first way of looking at it and that’s a good way of presenting it to maybe a senior management board and someone that has to write this off. And it’s something actually that we put a lot of time into helping our clients with, where we’re putting together reports looking at the potential value add of going through a project like this, really from the perspective and with the objective in mind of let’s make sure that we can get the signed off by proving the value of the technology solution, which eventually will be proposed. So when it comes to looking at the pricing between the various vendors, you might get to them in a process that might be, say three or four different solutions that you’re looking for and you’re assigned to ask for pricing information. There are a few to bear in mind. First of all, some platforms will do things to other platforms will not do. And so you should also consider the extent to which each platform is able to deliver against the key requirements that you’d have for your projects, right? Some might have built in LP portals for example, that wouldn’t require extra expenditure versus other platforms where you would have to engage in that valuation module. So you’ve got to think about, what’s included and what isn’t included and value between the platforms as far as their ability to satisfy requirements first of all.
Tim Friedman
The second thing is, and this is why we do a lot of work again in helping clients to understand the various differences between pricing is that there are a number of variables, assuming that the platforms are doing exactly the same thing and really it’s a question of, okay, so how do I compare the prices? This is where, and I don’t think it’s anything that’s intentional on the part of the different software providers, it’s just a result of varying different strategies and different approaches and cultures and values, but there are certainly different ways in which pricing is presented. And so typically you’re looking at what is the structure around implementation? Is the cost of implementation included? So there are certain vendors that will include the cost of implementation and then there are others that will charge separately for that. You would think about is the implementational coming as a one-off, as a lump sum, or is the vendor willing to split that over numerous years in order to not have such a big jolt for that first year at getting things up? So implementation is certainly a consideration.
Tim Friedman
Then you’ve got to think about what is the mechanism by which pricing will increase in future years, right? So what is the mechanism? So if we’re thinking about, say a data management from the portfolio monitoring perspective, it’s typical to see for example, with the addition of every portfolio company, there would be a fee associated with that. And so it’s really important to consider what the pricing will be, not just in year one, but what the pricing is going to be in year two, year three, year four, year five. And we like to model that out based on numerous different scenarios and so we’ll look at these different variables and say, “Right. So here are some various different scenarios and then for the next first year, but then also second, third year, and then up to maybe the fifth year, here is the likely cumulative cost of each of these various different platforms.” And it’s not that rare to see that the platform, which on paper looks cheapest actually has a more linear progression as far as pricing and with firms that are set to grow, can actually turn out being much more expensive than ones that have more of a significant within the first year for implementation, then it might drop down and then the progression with each additional portfolio company in future years might be less aggressive for example.
Tim Friedman
I’d say as well that it’s always a good idea to think about safeguarding yourself against unexpected price increase in future. So you would want to think about, okay, so what’s going to happen at the end of the term. We’d want to make sure that there was understanding as far as what the likely scenario will be come renewal at the end of the first term. I think that’s an important factor. And then the final thing that I would also urge people to consider is the cost of ownership. So various different platforms will have varying degrees of what the user is able to accomplish and where they will need to get the help of the professional services team for that technology solution in question. And so there are certain platforms where they are able to do or they have provided the client with the ability to do certain things themselves on platform. Whereas other vendors, you would have to go to their professional services team in order to make certain customizations and changes. Now I’m not necessarily saying that one is better than the other as well, because there are definitely firms that would rather go to the vendor and say, “You guys know what you’re doing. You do this all the time. I want to add this to my platform and make sure that I don’t break it.” And would like that approach.
Tim Friedman
And then there are others that would rather be able to do more things themselves and call upon the professional services team where needed. So I’m not necessarily saying that there is a difference, but suddenly there are price implications to consider when it comes to cost of ownership and just something else for people to bear in mind.
Kali Jakobi
So, as investors are proving out these pricing points and seeing what their best fit is, what are some key points to consider when they’re viewing demos from various providers? In other words, what helps investors feel confident in a solution and says, “I know that this solution is going to fix my problems.”?
Tim Friedman
It’s a good question. And I would be surprised if there were many people in the world who saw more demonstrations of different private equity software solutions than we do here. Because we do this [inaudible 00:32:05]. And I think one of the things that we get, and it is somewhat of a unique experience is the demonstrations that go on are actually really different. Different firms have very different approaches towards how they are demonstrating their platforms. So what I would say is this, it’s often the case that like it or not, the salespeople within these software companies are normally amongst the highest paid people at the company, right? And you think, well, why is that, right? And there’s an answer to that. And that’s because the sales person is able to have a big impact on the perception that the client is left with, or the potential client is left with following the demonstration.
Tim Friedman
And good salespeople are able to bring together the best elements of that platform with the key requirements and what’s going to resonate with the prospect in question, right? And also will be able to intelligently maybe steer them away from the things that maybe aren’t as well aligned. And this is where we recommend that it’s really important to take control of the demonstrations. So we would advice anyone that’s looking at one of these technology solutions. Don’t go into a demonstration with a blank piece of paper and say, “Right. Show me what you guys can do.” That is going to lead to a few things. First of all confusion. You’re going to forget which platform does what by the time you’ve looked at a bunch of them. It’s going to leave you susceptible to which of these firms has a good sales person and has done a good job at showcasing the best part of their plan.
Tim Friedman
It’s one of the things that can really extend the procurement process because you end up doing multiple demos to really try and get to the bottom of things. You’ll go to one platform, they show you a feature, then you’re going back to the other platform because they didn’t show you the feature that they have, which is like that. Do they have that feature? Very confusing if you do it in that way. I think the important thing with demos is to take control of the demo. And so I would make the following suggestion. This is certainly how we put things together when we’re working with our clients on procurement projects. We will have a framework from which we will use to make an assessment. So we will try and guide the demonstrations and we will try and maintain a matrix of functionality and also the perception of the platform in a softer sense. So the look and feel and what have you as well.
Tim Friedman
But really looking at the ability of the platform to perform for the key requirements. And so, for example when we’re looking at portfolio monitoring, the first thing on our list would be, so what’s the data ingestion process look like? What is the platform able to do as far as taking the existing data and getting it into the platform? And it’s one of the things that people often overlook, but actually it can be one of the biggest differentiating factors of all when we’re looking at some of these platforms and there isn’t necessarily a right or wrong answer as to what the best approach would be. But I would say that there are approaches, which are better suited to the different situations that you might see at a private equity firm. And so there are firms where they already have Excel templates that they have their portfolio companies filling out and platforms that are able to digitize that process and maintain basically what’s already going on. That’s absolutely fine, right? And so you would be looking for alignment there and you would make a assessment of, okay, so how aligned is this with what my current process is? Try and understand what changes might be required internally in order to align and digitize these processes.
Tim Friedman
But then there are firms where they might have minority investments. They’re not able to standardize the reporting, or maybe they just don’t want to. They see the benefits of having different companies reporting in different ways and they want an approach where there’s a more sophisticated approach towards state or ingestion around mapping the various different data points and questions. Again, there are platforms that can do both. And so really, it’s a question of understanding what you really want to get from the platform and then controlling those demos and pushing it out. So we wouldn’t sit on a demo and it’d be like, “Right. Let’s look at this.” We would say, “Right. So let us understand what is your approach towards data ingestion.” “Here’s how we currently do it. Please help me to understand what this would mean for me if I was to use your platform.” And if the response to that question is, well, you’d have to change your entire data ingestion process and move towards an approach that’s going to align with our platform that might not be a deal breaker, but it might be a big negative mark for that vendor in question compared to other vendors that can require that.
Tim Friedman
And so it’s just the question of taking that on and going through the whole process. You’re looking at the tear sheets, you’re looking at the ability to duplicate reports, you’re talking about scenario planning, all of the various different things that go on and saying, “Look, these are the things we really care about.,” and then you’re locking these in a formulaic way across the various different vendors as you’re going through the demos, then you can come back to it at the end and you can say, “Right, let’s make an intelligent assessment based on the various different factors that we’ve logged as we’re compiling this framework and as we’re going through these demonstrations.” This to me is the best way of being able to get towards, right, let’s try and get down to a final two or three that really have a good alignment, and then let’s put them to the test. And that’s where we would say, let’s make it real. Let’s potentially try and do a workshop. We could start to provide some real examples of actual reports from a company, from portfolio companies, have them reproduce reports which we’re already doing and really just show us what it’s going to be like to live with these platforms on a daily basis.
Tim Friedman
Of course, you want to make sure that you’re not doing that with too many vendors who at this point, when you’re talking about the workshop, you really want to be down to maybe two or three and you’re just trying to make sure that you’ve absolutely made the right decision there. But that’s the process that we would really encourage people to go through. Make sure you’re controlling the demo, make sure that you’re seeing what you need to see in order to be able to do as close to an apples to apples comparison between the various vendors as possible. Now, of course, you also want for each of the vendors to be able to say, “Well, look. Here’s some of the stuff that you might not have thought about, which you would be able to do with our platform,” and that might spark some ideas. And that might be increasing the perception and potential for future value add as well. So I’m not saying that that you wouldn’t want to listen to what the salespeople were saying as far as here are some of the things which you could be doing, which other users of our platform are doing and get value from. That’s all well and good, but that shouldn’t take precedence over making sure that you’re controlling the demo and ensuring there’s a good alignment between requirements and what each platform has [inaudible 00:39:42].
Kali Jakobi
Right. Absolutely. And so once they have narrowed down those vendors, they’ve gone through the ringer and they’ve decided on their final vendor, for my last question, I’ve heard of buyers having trouble getting buy-in or budget approval once they finally have gone through this whole process to select their vendor. What are some measures that you’ve heard or that are helpful to get through that bottleneck at the top?
Tim Friedman
So it’s a really good question and we see this a lot. And we actually designed our service with this specifically in mind. Our procurement services really designed to ensure that at the end of the day, when you were coming to seek approval, that you don’t have these problems. But if we take a step back for a second and just think, why might these problems exist? Why is this such a big issue and often something that can serve to slow down procurement and people aren’t sure. I think it’s because if you think, well, how much does say a portfolio monitoring solution costs? It’s a tough question. No one knows the answer to that. Not many people know the answer to that. Whereas, if you were asking or you are discussing with your husband or your wife, look, I want to buy a BMW and it costs $50,000. You think, okay, well that seems like a reasonable, I know roughly what cars cost, that seems like a reasonable cost. You’ve got some way of conceptualizing yes, that seems reasonable and if someone say, “Look. I want to spend $300,000 on a BMW,” you think that’s ridiculous, that’s way too expensive, I’m not going to be happy with that, you’re being ripped off. That doesn’t exist with say portfolio monitoring software. There isn’t like a marker where everyone has a real understanding of what these things necessarily would cost.
Tim Friedman
And so oftentimes people therefore fall back and say, “Right, well, let’s try and push the pricing down or have you got a good deal, they’re not really sure,” because what are they using to assess the pricing in the end? Often it’s just a question of saying, well, this is what the sales person said. I asked for a discount and they said they could give me 15 months instead of 12 months and so I think I did a good job and it’s just not a very confidence inspiring approach. A better approach would be to have quantified exactly what you are expecting to get from this platform and then be able to present, well, look, this is the pricing here is the value that we expect to get from this and so this is an investment we are asking for you to make an investment which will, we hope, improve our efficiency and give us additional value as far as what our capabilities are. And then the pricing starts to make sense. You can conceptualize that.
Tim Friedman
You can think, well, if we’re going to free up a hundred man-days per year, and we’re going to be able to produce those reports, which I know I would need to get an analyst to work on per week to do that and you say we can do that in this amount of time, then people can start to get their heads around this. They can start to understand and appreciate that the pricing has some kind of bearing towards real life and towards what… Sorry. And they can start to recognize the value that the platform can bring and the price starts to have something that they can conceptualize and approve. The problem when you just go and it’s going to be $50,000 plus this implementation, you’re asking people to make an assessment and sign something off when they don’t really have any of the data that they would need to sign that off. So just give them the data.
Tim Friedman
And so this is why when we do one of our procurement processes, we actually create an audited report. And the report will say, these are the platforms that we looked at, these are the ones that we demo, these are the ones that made it through to the final assessment, these were the key requirements. This is the value that we think is going to bring. All of these different factors, so that can be presented to senior management. And it’s easy for them to look at the report. And instead of really touching the pricing, they might question some of the variables within the report. They might say, “Wow, can we really get that much efficiency gain,” or “Is this a reasonable assumption to make?” And you can knock different elements of the model, but conceptually speaking that approach of this being an investment with an expected return is definitely a way to go in our experience.
Kali Jakobi
Absolutely makes sense. Well, Tim, thank you so much for walking me through this process today. And for people looking to further this conversation, what is the best way that they can get in touch with you?
Tim Friedman
They can certainly visit our website which is pestack.com and you can hit us up on the website. We’ve got a pretty good following on LinkedIn also or call us in our sunny California offices during general Pacific opening hours I guess.
Kali Jakobi
Definitely jealous of sunny California these days as I am not there any longer, but thank you so much, Tim. That is all for this episode of data disruption, be sure to subscribe, share and leave us a review. And that’s all. Thanks for listening.