Sajjad Jaffer is founder and managing partner of Two Six Capital. The San Francisco firm developed a data science platform that supports investment decisions. Two Six said it’s the first PE firm to embed data engineering and data science into its investment strategy. The firm advises many of the largest PE firms.
Explain how Two Six is both an adviser and investor.
We’re a technology company with a hybrid business model. We work with private equity firms, buyouts and growth, the large and middle market. We are regarded as diligence advisers. In select situations we co-invest alongside the sponsor. We have the ability to write checks from $15 million to $75 million. There’s another element to what we do, which is value creation. We work with target portfolio companies to drive operational improvement. We’re hired by private equity firms as a commercial diligence adviser.
Think of us as the opposite of firms like Bain or McKinsey. They take the top-down point view of businesses using surveys and benchmark studies to make estimates of business, of growth. We come in from the opposite, from the bottom up, taking an inside-out approach. We take all the receipts that a business has. We take that data to come up with a point of view on revenue. How does this company makes its revenue? We count every individual receipt and forecast where the company’s sales and gross margins are headed. We can come up with a short-term prospect of the company’s business plan that understands and projects the business’s revenue. That is our absolute core competency.
When do PE firms hire you?
They hire us when there is a deal being shaped. Sometimes we’re brought in before the LOI. We can help influence and shape the deal, to work together, especially in competitive situations. We are introduced as a value-added partner that can help management grow the business using big data. Many target companies are looking for these capabilities. Private equity firms will incorporate our transaction data requirements into the diligence processes. We present our findings to investment committees, to the ratings agencies, to the lenders and to the management teams themselves. We explain how we understand the business and why the business is great. That is used to underwrite the deal.
From the data, we can see the opposite to the growth of the business. We can see if the business has tremendous headroom for growth; we can see that in the data. It will have it incorporated into the data diligence process. That increases the chance of a deal because management will see value to the deal. It’s strengthening our hand.
[Right now] we’re working with a large well-known retailer, working on various business transformation initiatives such as understanding the customer’s share of wallet, which customers to target for cross-selling, identifying who are their best and worst customers, who are one-and-done customers, and identifying which stores to open or to consolidate. All of this is explained by the large customer and product SKU-level data set inside the business.
How do you get a company’s dataset?
It’s all the receipts that live inside the business, in the company’s enterprise technology platform. It could be their business intelligence system, or their data warehouses, or their ERP, CRM, POS. We don’t care what system [the company] works on. What we do is vacuum that data that lives inside the firewall and take that into our cloud servers. That’s where we perform our high-scale analytics. This is very different from traditional technology companies that focus on installing software in companies. This can be time-consuming and causes friction. We take data that they have in any system and take it into our cloud servers and analyze it there.
Who are your customers?
We work with over 20 PE firms, targeting specific industry sectors. Our top sector is consumer and retail. Our second largest sector is TMT, including software and SaaS companies. The other category includes financial services, so we work with banks, consumer lenders. This also includes industrial manufacturers. These are companies that don’t attract consumers but have large number of widgets, distribution channels and partners. “Other” also includes business services … we’ve worked on $27 billion of private equity transactions that have closed. That doesn’t include the long tail of deals that didn’t go forward. In many cases, those deals didn’t go through because Two Six was instrumental in identifying issues with the business. In some cases, after unpacking the data and classifying consumers, our individual cohorts found that customer quality was getting worse.
What does the name Two Six mean?
The firm was named after my business partner’s son’s date of birth. He was born on Feb. 6. That’s where we got the name Two Six Capital.
Action Item: For more information on Two Six: www.twosixcapital.com/