How can private equity investors gain deeper, actionable insights into a company’s financial health? In the dynamic world of private equity, the demand for data-driven analysis continues to accelerate. Investors need deeper, multi-dimensional insights into financial metrics to drive informed decisions, streamline due diligence and enhance exit strategies. This is where the data cube comes in; it stands out as a specialised tool that enables business owners to gain a clear, segmented view of their business e.g. sales and margin data or recurring revenue (ARR), offering a new level of granularity in the decision-making process.
This blog explores the data cube’s role in the private equity landscape, providing insights into its applications, benefits and unique advantages over traditional financial analysis. Here are the key questions we’ll address in this blog:
- What is a data cube?
- How does the data cube enhance financial analysis?
- What are the key benefits of a data cube for private equity investors?
- Why is demand for data cubes growing?
- How can a data cube be a cost-effective and flexible solution?
Follow us on LinkedIn and X (formerly known as Twitter)
What is a data cube?
A data cube is a multi-dimensional data model that organises and segments critical financial data – specifically sales and margin metrics, but can be expanded to include any financial metrics. It allows investors to slice and dice data across different parameters such as customer type, product or service line, or geography, giving them a flexible and clear view of the business’ profitability.
In the due diligence process, this level of financial visibility is invaluable because investors can quickly analyse a company’s performance and pinpoint value or risk areas, making it an essential tool for PE firms in today’s data-rich environment.
How the data cube enhances financial analysis for PE firms
- Granular analysis of profitability: The core advantage of a data cube is its ability to break down sales and margin data across different segments, providing a detailed view of profitability. For PE firms, this granular approach to financial analysis helps reveal areas of strength or under-performance within a portfolio company. By segmenting sales by customer, product, or region, investors can identify where the company excels and where improvements are needed, informing strategic decisions around growth, operational efficiencies and valuation.
- Streamlining due diligence and reducing risk: Traditional due diligence can be time-consuming, especially if financial data isn’t readily available or doesn’t provide the depth required. The data cube allows potential buyers to examine sales and margin performance through flexible, segmented views, speeding up the due diligence process significantly. For private equity firms, having a data cube in place early can save weeks of effort and reduce the risk for buyers by providing clear, well-organised financial insights. For private equity firms, having a data cube in place in advance can reduce the risk of deals failing.
- Preparation for a smooth exit process: A well-prepared data cube is an asset when a private equity firm is ready to exit an investment. Multi-year historical data, combined with forward-looking projections, provides a comprehensive view of a company’s growth trajectory, making it highly appealing to prospective buyers. The financial clarity offered by a data cube-ready setup de-risks the acquisition process, increasing the attractiveness and value of the company for buyers.
Key benefits of a data cube for private equity investors
- Efficient and streamlined due diligence: A data cube significantly shortens the due diligence timeline by offering segmented sales and margin data in a readily accessible format, which allows buyers to conduct financial analysis with minimal delay. This makes the transaction process faster and less complex. For private equity firms, the datacube ensures that key financial data is available at the right level of detail, giving buyers more confidence in the value of the company.
- Consistent multi-year data alignment: Investors need multi-year data to understand the company’s performance trajectory. To get the most value from the data cube requires data alignment across historical and projected time periods, which is crucial for valuation accuracy and strategic planning. This data consistency across time frames ensures that private equity investors gain a reliable view of the business’ financial health, both past and projected.
- Cost-effective solutions for PE firms of all sizes: For large deal sizes, PE firms might opt for extensive data cube solutions with the help of expensive consultants. For smaller or mid-sized deals, more affordable models are more appropriate that still offer the necessary insights for due diligence and exit planning at a fraction of the cost. Affordable data cube solutions, backed by skilled FP&A and BI teams can align data across the review period, whether looking back historically or projecting forward. This flexibility makes the data cube accessible to firms of all sizes because it ensures that financial insights are actionable, timely and tailored to each firm’s unique objectives.
Why demand for data cubes is growing in PE
The rise of analytics tools like Power BI has made interactive data analysis more accessible and it is now an expectation of buyers. PE investors increasingly value data-driven insights, requiring deeper analytical tools like data cubes to gain a nuanced view of a company’s profitability and growth potential. For companies preparing to exit or attract potential investors, showcasing their financial health through a data cube can make them more attractive and increase valuation.
Data cubes allow for complex, segmented data analysis in a way that traditional financial reporting cannot, providing investors with a clear, interactive view of financial metrics. This aligns with the broader trend in private equity towards data-driven decision-making, making datacubes an asset in the modern investment landscape.
Leveraging the data cube advantage for private equity investment
In today’s evolving private equity landscape, the data cube is becoming an expectation for every deal but it can be a challenge for smaller to mid-sized businesses. The data cube provides actionable insights for PE firms seeking to create value and streamline transactions. A data cube can lead to faster transactions, higher valuations and successful exits.
As the sector continues to embrace data-driven approaches, the data cube is a cornerstone of rigorous financial analysis because it offers clarity, flexibility and confidence; elements critical for making informed investment choices.
How specialists like iFD can help
Private equity firms demand comprehensive and flexible analysis of financial performance. Specialists, like iFD, backed by the support network of the wider Isosceles Finance team, as well as the Dains group of companies, can support private equity firms in establishing a flexible and material tool for rigorous and ongoing financial analysis.