Data Science Powering Private Equity
- by Matthew Brodsky
For their entire tenure at Wharton, as marketing faculty member Peter Fader explains, he and co-director of the Wharton Customer Analytics Initiative Eric T. Bradlow W88 have been toiling away at interesting analytics models and then sharing them far and wide in the hopes that they would be useful to marketing practitioners. One such model forecasts lifetime customer value as a way to deduce overall corporate valuation. Alas, Fader and Bradlow never had any takers … until two Wharton alumni came along.
Sajjad Jaffer and Ian Picache (both WG01) have taken Fader’s model and built a business around it called Two Six Capital (named for the birth date of Picache’s first-born child). The firm, whose vision is to transform investing through data science, is fast revolutionizing how private equity groups invest their billions.
It’s also a phenomenal Wharton Effect story.
“We pretty much bleed red and blue over here,” says Picache.
Out of the firm’s 11 full-time employees, seven are Wharton alumni across Ph.D., undergraduate and MBA programs (plus one astrophysicist from Penn). Co-founders Jaffer and Picache were MBA classmates at Wharton.
“We’re both bald, and we met at the same barbershop,” Picache kids.
From 25 years of research and built-up intellectual capital from Fader and Bradlow—Wharton’s Frances and Pei-Yuan Chia Professor and K.P. Chao Professor, respectively—the Two Six team has turned their knowledge into an innovative investment approach. The pair kept in touch since graduation and were looking for an opportunity. They started reading Fader’s white papers and trying to remember their math from a decade ago to find applications for the research.
As Fader puts it, “[They are] putting serious money where someone else’s mouth was.”
Or as Picache puts it, “The impact that Wharton has had … has really been for us quite mind blowing.”
Wharton Effect, coincidence or not, the team has enjoyed immediate success. Jaffer and Picache founded the firm over two years ago, and in that short time, Two Six Capital has participated in $10 billion’s worth of private equity transactions, including the largest buyout of 2015 to-date (Informatica). In the past 12 months, Two Six has analyzed over $20 billion in individual transaction data. As Picache explains it, their data science approach has already become embedded in decision-making in private equity; it’s a big data play that the private equity types “get.”
“We really caught a wave,” he says of the perfect timing of their business. “It is a breakthrough approach. … From a market timing perspective, we have been very lucky.”
In its essence, what Two Six Capital has is an advanced analytics platform powered by the latest in number-crunching cloud technology and the flood of available data. It can input hundreds of millions of rows of data, which then Fader’s models digest to understand how consumers behave. A thousand servers can spin up at a moment’s notice to do the math to answer questions like: How is a company growing? Where are its customers coming from? What quality are these customers, and how is that quality changing over time? How well are current products attracting consumers? And how successful are the channels by which they are marketed and sold?
“There is a boatload of data out there that no one is taking advantage of,” Picache says.
Significant data exists in company databases such as dates of purchases, what is purchased, how often products are purchased, where they are purchased and which channels customers came from. These data can be appended with third-party sources, like whether or not a product is being tweeted about, and whether those tweets are negative or positive. Or data like imagery from retailers’ parking lots that can determine whether one retailer in a particular spot is busier than others. Or imagery that deciphers how many cars are coming out of a automaker’s manufacturing plant.
Jaffer adds that the launch of their firm coincides with a structural shift in the private equity industry itself. Value creation has become the critical component of generating outsized returns. And the way he sees their technology in this bigger picture is that the customer value approach allows private equity investors to see the “value creation roadmap” before a deal occurs.
The same structural shifts can be seen in public markets, Jaffer says. Hedge funds, for instance, have traditionally focused on flash trading and sentiment analysis. Now, the move is toward fundamentals-based quantitative analysis, which Two Six’s platform enables.
Fader is of course thrilled at their success and that his models have unprecedented value to the investing world. And as special adviser at Two Six, Fader is along for the ride as well. He also gets two valuable business leaders in Picache and Jaffer to serve on the board of the Wharton Customer Analytics Initiative. We don’t need a model to tell us that’s a fair deal.