Wall Street is turning to its biggest brains as the battle for supremacy in the world of private assets heats up.
Quantitative analysts — more usually found in data-heavy parts of the financial ecosystem such as stocks or derivatives — are being deployed by firms like Ares Management Corp. and BlackRock Inc. as they race for an edge in private equity and credit.
These opaque markets have grown fourfold over the past decade to command $10 trillion, according to data from alternative-asset consultancy Preqin. But systematic players typically haven’t been heavily involved because private assets lack the reams of numbers where quants can hunt for profitable patterns and dislocations.
That’s changing as the likes of Los Angeles-based Ares find other uses for data science — such as better explaining investment performance across its $395 billion portfolio.
“You will still see people in private markets who will just look at absolute returns,” said Avi Turetsky, head of quantitative research at Ares. “On the other hand, you do have institutional investors who are increasingly getting at the questions: ‘What are the factor exposures? Can I separate alpha and beta?’”
Turetsky is talking about untangling the part of a return that comes from a manager’s investing prowess and the part that simply comes from the ups and downs of the market overall. For many active managers in the stock market, that insight has been a source of pain for years now.
At Ares, quant models not only help evaluate the skill of external managers and guide secondary investments, they shed light on which industries or sectors are yielding more alpha. Turetsky joined the private-credit giant through its acquisition of Landmark Partners, which has helped boost the number of quants on staff to about 30, from fewer than 10 in 2020.
The quant ambition in private markets generally falls far short of the revolution they kicked off in equities over seven decades ago. The business is defined by intermittent deal-making and hands-on management, making it unlikely math and formulas will ever be more than auxiliary to humans.
But the bet is there’s still big potential to apply quants’ signature statistical rigor to the space, if only because there’s currently so little of it.
Firms are looking to hire data scientists to help portfolio companies dissect trends and map out markets, says Stuart Wilson, executive director at recruitment firm Dartmouth Partners. Some are using their talents to help winnow down a massive pipeline of potential deals.
“They’re looking to bring data science into that process so they can say, ‘we didn’t just make this change to the business because one of our partners had done so successfully 18 years ago,’” Wilson said. “‘We are doing it because that is the direction in which the data is pointing us.’”
Over at BlackRock, the math wizards in its $218 billion systematic unit have built a model to help identify late-stage venture investments with the highest odds of paying off either through a listing or acquisition.
Ronald Kahn, the global head of systematic equity research, says he’d hardly spared private markets any thought until a few years ago. Now, his team is increasingly involved as the firm in June set out a goal to double revenue from the asset class over the next five years.
“One of the advantages that systematic approaches have is this idea of breadth,” Kahn said. “We do get the advantage of being able to follow thousands of companies and then having a view of which are the best ones to look at.”