Due diligence is changing to adapt to market conditions that no longer reflect typical acquisition risks. Researching quality of earnings or growth prospects takes on added significance, and difficulty, with deal valuations at all time highs. A seller-friendly market also complicates the landscape for bidders. How much to push back on seller estimates when every bidder pool seems deep is an open question.
Financial sponsors are turning to a variety of solutions to expedite due diligence in these conditions, according to findings from West Monroe’s Future of Diligence in Private Equity report. Sell-side due diligence can help buyers assess a target’s factual stats at a glance, reducing the back and forth associated with a typical research process. Buyers are also turning to technology to digitize the process, leveraging data to create actionable insights rather than relying on in-person assessments. That way management can save time and sway, reaching out to sellers only for inquiries about value creation. Factual inquiries should be the province of seller-provided and digitally-generated research.
The findings, coming from general and operating partners, are telling. One reason that analytics are helping to inform buyers’ analytics is due to a drift upward in deal valuations. Buyers want to validate future value creation rather than simply investigating risk mitigation when assessing potential targets.