It comes as no surprise that the market for PE acquisitions continues to be robust. Global deal value increased from $594.54 billion in 2015 to $825.77 billion in 2018 and that’s nothing compared with the predictions for 2019.
Buoyed by low interest rates, an eager supply of deal financing and a prolonged period of economic growth, PE has plenty of dry powder and has proved to be resistant to the impact of trade wars, tariffs and political uncertainty. However, not all factors are positive: Valuation multiples remain high and there’s considerable competition among PE firms to find and acquire those elusive “diamonds in the rough.” At the same time, corporate “strategics” looking for suitable acquisitions to support their growth, are offering a viable alternative for firms considering sale.
With these competitive factors, how can PE firms gain an advantage over their competitors, make smarter buying decisions, and speed up the value creation process? The answer lies in operational due diligence (ODD), paired with the advanced capabilities of data analytics in assessing target companies. Recent advancements in technology are allowing for automation to drive intelligent data processing and deeper insights to help PE firms determine with confidence where the opportunities for value creation lie.
The importance of TVO operational due diligence
Total Value Optimization (TVO) operational due diligence, based on a foundation of data analytics, cuts through the noise and gets straight to the facts which sound decision-making is based on. This helps PE firms identify target companies, analyze their potential and implement the necessary cross-functional processes to accelerate time-to-value creation. PE firms across all industries are increasingly making use of data analytics and operational due diligence to:
· Identify and screen fast-growth businesses
· Determine with confidence where the opportunities for value creation lie
· Quickly identify potential deal breakers and underlying commercial risks
Due diligence provides fast, accurate visibility of the financial information PE firms need. What differs with a total value approach is its ability to identify supply chain and operations-oriented value creation opportunities both pre-and post-acquisition. This enables PE executives to quantify EBITDA improvements, together with working capital risks and opportunities. These are coupled with an implementation road map for the first 180 days and beyond, with an emphasis on quick wins to support positive internal rates of return (IRRs) in year one.
How data is transforming the ability to identify value
One of the most significant opportunities to impact the success of due diligence is understanding how to leverage data. In today’s market, the ability to tap into the volume and variety of big data can provide private equity stakeholders with the competitive edge in operational due diligences. With the ever-increasing availability of data, analytics can help PE executives understand the value drivers that identify revenue and profitability opportunities. In recent years, we’ve seen the emergence of several data analytics tools which are capable of significantly accelerating the process. These tools allow data extracted from multiple entities to be organized, assembled, cleansed and visualized. Automation and AI have also dramatically improved the ability to review thousands of files and contracts, targeting keywords and insights.
Data analytics can also help unlock exploratory insights, looking at data available on demand through public sources, market subscriptions, and social media. This allows for performance benchmarking of external trends, helping provide guidance on the potential value of cost reductions, generating cash and enabling growth. Giving a more strategic role to data analytics can increase accuracy in valuation of the target and improve management. This ultimately results in better portfolio value.
Driving value throughout the PE lifecycle
While many PE executives are realizing the value of technology throughout the operational due diligence process, less adept companies are continuing down the well-worn acquisition path. In today’s world, this could mean losing out to their smarter and more nimble competitors who are already using data analytics and artificial intelligence to generate and close more transactions, earn higher rates of return, and lower risk.