An Economic Case for Transparency in Private Equity: Data Science, Interest Alignment and Organic Finance

Abstract

The private equity asset class has grown rapidly since 2008, attracting institutional investors in need of higher returns than those expected from public markets. But while most investors would say they have been rewarded with good performance, this success is hard to objectively demonstrate due to intransitive metrics and unmeasured risks. It is our belief that there is a pressing need to substantiate the economic case for private equity. In this article, we describe a new transparency framework, which we situate in our research agenda on ‘organic finance’. The framework uses data science technology to operationalize private equity data and institute a scientific approach to performance measurement. We elucidate what scientific measurement should look like in private equity, incorporating examples of technologies in use today. We also reveal how bringing new levels of transparency into the asset class can, on its own, create significant value. Finally, we look at the effect of organic finance on the industry, connecting greater transparency to a structural shift that enables efficiencies, expansion, and innovation. The magnitude and sustainability of this shift reinforces the economic case for private equity, albeit with far more transparency than is practiced today.