Tight time constraints on commercial due diligence and changing market dynamics may slow the process of securing a deal. This company post, shared by David Burnie explains how to get a head start.
Private equity funds are always on the lookout for their next deal. They scour the market, have countless conversations about potential targets, and deal with increasingly intense competition. Once an attractive target is finally identified and courted, funds must go through the commercial due diligence process.
Tight time constraints on commercial due diligence
Due diligence brings many challenges, but perhaps none more salient than the requirement to digest a vast amount of information within tight time constraints. Deals move quickly, which means funds enter negotiations knowing far less about the target than the target knows about itself. By the time the target company grants data room access, funds are often faced with intense time pressures to digest the mountain of information provided before closing. Commercial due diligence ideally entails extensive research and a host of conversations with customers, competitors, and other relevant experts. Even though funds can accomplish a lot in a short time, their time to poke and prod is usually cut short. Consequently, there is a risk of important details falling through the cracks.
Changing market dynamics
In addition to these traditional challenges, new market dynamics have made the deal-making process even more difficult. Today’s uncertain economic environment has a ripple effect into the private equity space. After a record-high year of deals made in 2021, rising interest rates and slowing economic growth have caused funds to step on the brakes. In the first half of 2022, deal volume declined by 26% compared to the same period last year. At the same time, there is currently a record-high level of capital ($3.6 trillion) available to be deployed by private equity funds.
The combination of fewer deals and more capital available creates a dynamic where attractive deals become increasingly competitive amongst funds, adding more pressure for firms to act decisively to win these deals.
Getting a head start on due diligence
The unique current market conditions compound the traditional challenges of deal-making. To counteract these conditions, funds should get a head start on closing the information gap to enable quicker and more confident decisions when a potential deal comes into play. Funds can execute the following elements of commercial due diligence before they face the time pressures of a closing deal.
Key points include:
- Understand the industry and market dynamics
- Understand the competitive dynamics of an industry
- Executing on upper funnel due diligence
Read the full article, Getting a Head Start on Commercial Due Diligence, on BurnieGroup.com.