Due diligence has always been important to PE firms. In 2019, the role in-depth research plays in a firm’s success continues to grow. Today’s hyper-competitive, fast-evolving business environment makes it critical to understand the potential value of a target. In other words, firms must view due diligence as an essential element of success.
What are some of the current trends in due diligence? They include:
- Implications of changing SEC regulations
- Investor demands for more transparency
- The need for more effective communication
- Growing data security risks
The SEC continues to update its regulations. If your deal teams and managers don’t understand the implications for a particular opportunity, the result can be costly. And, amid all this change, today’s investors demand transparency. Fail to provide it and you can expect them to take their business to one of your competitors. In addition, effective communication has become more crucial than ever.
PE firms must also contend with growing information security risks. If you are unable to protect the data you have collected and generated, you may experience a breach that not only impacts specific deals, but also tarnishes your reputation and can affect your ability to make deals in the future.
What’s trending with deal teams?
PE firms today tend to have a great deal of capital to work with. The ones that make the most of it are those that focus on specific sectors. Cambridge Associates notes that between 2001 and 2010, sector specialists outperformed generalists in many ways, citing consumer, financial services, health care, and technology investments as examples that earned anywhere from 1.7 to 2.0 times MOIC.
Another trend affecting firms and deal teams is that the rate of IPOs has slowed. The fact that companies are staying private longer stands out as one of the key drivers of this change. In 2014, the average age of companies that went public was 11 years, as compared to an average of four years of age in 1999. Some believe that fear of another tech bubble is behind this delay. However, the fact that the IPO space has matured and smart investors are choosing their targets carefully is more likely causing creating this effect.
What do due diligence trends mean specifically for deal teams?
As deal teams, managers, and firms experience greater competition, two things are clear:
- An effective strategy is essential
- Technology can provide a competitive edge
All of the stakeholders in a firm must be proactive and work together to craft tactics for addressing new challenges. Ultimately, forward-looking firms can use this period of rapid change to their advantage. By investing time and effort in staying up-to-date on the latest trends and using what you learn to modify your strategy, you position yourself ahead of competitors that fail to do so.
The most productive and cost-effective way to keep up with due diligence trends and the need for transparency, better access to information, enhanced data security, and improved communication is to leverage technology. Human hours are a finite resource, but advanced technology can be working around the clock to help meet your needs and those of your clients.
To be alerted about future articles, subscribe here.