Generative artificial intelligence and machine learning arrived with a splash in the LP secondaries market this year with several participants using large language models to gain an edge.
One manager that is putting generative artificial intelligence and machine learning at the centre of its investment thesis is London-headquartered Clipway. The firm was formed this year by a group of secondaries professionals including managing partners Vincent Gombault and Ingmar Vallano, and counts numerous former Ardian and Coller Capital executives among its team, as Secondaries Investor reported.
It is seeking $4 billion for its debut fund, according to Secondaries Investor data.
Secondaries Investor recently sat down with Vallano and Clipway’s head of data science Harry Vander Elst to find out more about the firm’s tech-enabled secondaries system (TESS). Both declined to comment on the firm’s fundraising plans. Here are four ways Clipway plans to use its system in the LP secondaries market.
A focus on value-add tasks
One of the most cumbersome tasks within secondaries firms is the process of data extraction – pulling figures from GPs’ and portfolio companies’ reports and adding them to a database to price books of fund stakes. Historically, this has been a manual task involving Excel; TESS is an application with different layers, modules and features via which Clipway conducts its analysis of portfolios of underlying company data.
“You don’t want to spend two weeks on data extraction,” says Vander Elst. “[Say] you are an M&A banker for five years and then you move into the secondaries space, and what you’re tasked to do is take PDFs and put data into Excel files.” At some point, that becomes less exciting, he adds.
TESS can accelerate this process and map different points so the team can spend their time analysing underlying companies and funds, according to Vander Elst.
Once the data has been extracted from PDFs, TESS begins an automated analysis of underlying revenues, EBITDAs, future cashflow projections and their frequency to compute gross proceeds for every underlying company.
“When the team starts their job, they don’t start from an empty Excel file on one hand and a bunch of PDFs on the other hand: they start from a pre-filled analysis,” says Vander Elst. “What we want them to do is to stress those analyses or to improve them, to speak with the bankers, speak with the GP, speak with whoever they know in the market who might know something about that company” and to conduct research about the assets, he says.
This means that instead of spending 80 percent of their time on low value-add tasks, the team spends 100 percent of its time analysing companies, Vander Elst says.
Data collection for continuous learning
Clipway wants to reuse the data it analyses for use on future portfolios that come on the market. Whereas some secondaries buyers will only run detailed analysis on relevant portions of their current portfolio or the part that accounts for the majority of value, TESS can be used to build up knowledge of the private equity industry, says Vallano.
With the metrics derived from quarterly reports, Clipway can use this for back testing: comparing projections against actual results, according to Vander Elst. This can be done on thousands of companies across different value drivers, revenues, EBITDA margins, leverage amounts, exit dates, exit multiples, valuations and more, he adds.
“You start to have really interesting insights on where the team is right and where the team is wrong,” Vander Elst says. “Are we good on some sectors, poor on some sectors? Is it on revenues, or is it on exit date? Or is it maybe on some other aspect? You cannot improve what you cannot measure.”
Clipway has already built up investment exposure to more than 100 GPs, according to Vallano. The firm priced around 300 funds over the summer.
Scale, not speed
The majority of LP secondaries sales are intermediated, with advisers running processes along specific timelines for indicative and binding bids for all interested buyers. According to Vallano and Vander Elst, TESS won’t allow Clipway to sidestep auction processes via pre-emptive bids. Instead, it should help the firm to operate faster and examine multiple investment opportunities concurrently, according to Vallano.
Buyers who act slower because they lack a detailed view on a particular portfolio are restricted to the opportunities they can plausibly focus on at a given point in time. The best way to be selective and deliver performance is to be able to look at the maximum number of opportunities, Vallano adds.
Stress tests and pockets of excess
TESS allows Clipway to run stress test scenarios on specific portfolios to estimate the impact on the value creation of companies – a task that would be near impossible using Excel, Vallano says. For example, the team can stress test for a pandemic scenario in which the energy sector suffers while tech companies grow more quickly. Within as little as three minutes, TESS can apply a particular stress scenario such as a 20 percent reduction in EBITDA growth, to thousands of portfolio companies. Doing so with TESS avoids operational risks such as human error in data input, Vallano adds.
The software also takes into account complicating factors that can affect net cashflows, such as fund facilities and where the fund is at in terms of its waterfall distributions if the fund is in carry.
“The relationship between gross and net [returns] is not necessarily linear,” says Vallano. Understanding this is key when it comes to pricing fund stakes, he adds. “If you don’t have that capability and if you take a big approximation in order to run your sensitivity test, you really lose the direct relationship between gross and net levels.”
This level of insight allows Clipway to chase any pockets of excess return in the secondaries market, according to Vander Elst. “Anywhere we see excess returns [in underlying funds], we’re going to go after it with super-high conviction.”