Private equity firms are fast approaching the end of the hold period for the companies that were acquired between 2006 and 2008-the last big bulge in deal activity. As these portfolio companies become ripe for an exit, intermediaries are starting to push deal timing, changing the way PE firms conduct due diligence, says Mindy Berman, managing director at Investor Group Services, a middle-market strategy consulting firm. Citing the current M&A landscape as a sellers' market, Berman discusses what dealmakers can do to handle the pressures of an evolving, and crucial, due diligence process.
What's unique about due diligence in 2014?
Since there is a lot of competition for deals, bankers are starting to push deal timing, squeezing private equity firms' ability to conduct thorough due diligence. When this happens, things can go sideways for both parties, or a buyer might get spooked and drop out of the process. They're also running multiple parties to the finish line. Those two factors affect the way our clients are thinking about due diligence. Dealmakers are now doing more planning up front to build conviction earlier on in the process. If a PE firm has done a lot of research on a sector, even before the deal, they can be more aggressive in terms of a bid.
Are there any trends in due diligence that you're noticing?
There does seem to be a trend toward more sell-side due diligence work. It's been more prevalent in Europe and serves as another tool in the arsenal. It puts the company in a positive light to have some of that work done ahead of time. It's one of the most effective strategies. In the 18 months before a sale, we would come in and do a study, but not explicitly for a sell-side report. It just highlights how the company is positioned in the marketplace, what goes on as far as growth potential and how other companies will perceive you. It helps them figure out what the diligence will look like on the buy side. If you spot an issue you say, "Is there any work that we can do to fix that?" That can be a very effective strategy for a company thinking about a sale. It's all part of the broad process of preparing to go to market.
Do you have any advice or tips relating to due diligence for dealmakers?
If you're on the buy side, there can be an over reliance on the expertise of operating partners. Now, they might have great perspective and be good operators once the deal is done, but they have different incentives. They aren't always objective and their information might, unfortunately, be a little dated. One mistake dealmakers make is not seek that third-party expert to gain a different perspective. There's a lot of pressure and scrutiny right now on operating partners due to the way PE firms account for how their partners get paid through management fees. So it's important to rely not only on that person's perspective but also on a third party point of view.