The Clot in Private Equity’s Lifeblood: Microsoft Excel

Private equity analysts often manage deal information on Excel spreadsheets, likely because Excel is familiar and available, or maybe because it appeals to their analytical sensibilities.

It does work to a certain point. However, Excel is plagued with fundamental problems that can endanger your firm’s health. A spreadsheet is often used as a database, even though it works poorly in that capacity. It typically grows in complexity over time and accumulates errors. Anyone can alter a spreadsheet and these changes cannot be tracked, making the information less than completely trustworthy.

But you already knew that. So, let’s get specific and explore how Excel can lead to much bigger issues in your deal origination efforts.

1. Excel doesn’t tell a story

With Excel, there is zero record of the firm’s interactions with target companies that you may want to put under watch. A spreadsheet only provides room to manage the few dozen or so companies currently in the pipeline, and even then it’s the bare facts like industry, EBITDA and revenue. Sorely missing are the thousands of companies the firm has engaged in the past and how their performance is progressing over time.

For example, say an analyst has a promising call with a target company that isn’t a good fit now, but may be a good fit in two years’ time. This data isn’t contained in Excel deal reports; instead the firm relies on the analyst to follow-up. Many don’t – or leave the firm. This risk becomes near impossible to mitigate with each analyst managing their own spreadsheet.

Ideally, key data about a target company is captured at an institutional level and accessible by others when needed. That way you can monitor the company’s performance over time and ensure that you provide a sense of continuity and progression in the relationship, even if an analyst leaves.

2. Excel doesn’t help you build relationships

Excel is poor at tracking your best sources of deal flow. Even if the deal report contains the bank or broker that brought the deal, the report itself is typically limited to the past week, month or year. Lost is the quality and quantity of deal flow from individual bankers or intermediaries over longer time horizons.

Leading private equity firms have this information and use it to their advantage. They know for instance which bankers send the most deals that reach a signed LOI, and then prioritize these relationships for more frequent touchpoints and business lunches so that way their best sources of deal flow keep them front of mind for future opportunities.

Some firms try unlocking this data in spreadsheets, but it just ends up frustrating analysts. Shaila Gupta, an associate at Mosaic Capital Partners, put it to us like this: “Manually figuring out all of this, assuming this level of data is even being captured, saps a lot of our time.” Mosiac and other tech-savvy firms that use Navatar perform the deal flow analytics automatically for them. No stressful Excel math or searches required.

Firms ahead of the curve even monitor how long it takes each deal to move through the various stages of the pipeline. If it is discovered that it is taking longer to pass deals through, say, the signed LOI phase, they investigate why and consider refining their practices.

3. Excel is the master and you are the slave 

Spreadsheets don’t help you with the next action step for pushing a deal forward. There are no reminders or alerts to help the team collaborate or follow up. The team must stay on top of the spreadsheet, in other words, because the spreadsheet doesn’t stay on top of them.

Diligent firms don’t leave these action items to chance. They have adopted tools and procedures that notify them when something is wrong, and have at their fingertips information on who is responsible for what and when.

4. Excel doesn’t travel well on phones and tablets 

Imagine having to edit an Excel spreadsheet while on the go. Even having to access a spreadsheet from your mobile can be enough to lose one’s hair. That’s becoming a bigger problem as private equity professionals increasingly work remotely. Travelling partners shouldn’t have deal data locked away in some analyst’s computer, they should have it instantaneously available no matter where they are in the world. Anything less risks a missed opportunity.

Robust deal flow will only become more important as private equity firms enter an increasingly competitive period for prize transactions. The market leaders in this new environment will point to a healthy circulation of deal flow coursing through the firm as a principal cause of their success.