Maine Pointe discusses how analytics helps private equity improve due diligence

01 April 2019 Consultancy.eu

Mark McTigue and Michael Kirstein, Vice President Private Equity and Vice President Europe at Maine Pointe, discuss why private equity firms are increasingly deploying data analytics to help them buy right and buy smart in a challenging market.

It comes as no surprise that the market for private equity acquisitions continues to be robust. Global deal value increased from $594 billion in 2015 to $825 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, private equity 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 private equity 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 private equity 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) and the timely use of data analytics (DA) and artificial intelligence (AI) in assessing target companies.

How data analytics helps private equity improve due diligence

How to pick winners in a challenging market

Private equity 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

In recent years, we’ve seen a number of data analytics tools emerge which are capable of significantly accelerating the process. These tools allow data extracted from multiple entities to be organized, assembled, cleansed and visualized. AI tools are also able to scour thousands of files and contracts, targeting keywords and clauses, further speeding up the ODD process. This is particularly important for firms with multiple add-ons and minimal integration.

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 private equity firms identify target companies, analyse their potential and implement the necessary cross-functional processes to accelerate time-to-value creation.

Due diligence provides fast, accurate visibility of the financial information private equity 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 private equity 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.

Driving value throughout the life-cycle

While many private equity 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.

Firms struggling with turning M&A deals into equity value

18 April 2019 Consultancy.eu

At a time when merger & acquisition activity is on a high, new research highlights that a majority of deals closed aren’t in fact contributing to equity improvements. 

To come to their conclusion, researchers at Willis Towers Watson and Cass Business School analysed the performance of all deals closed in the first quarter of this year with a deal value of above $100 million. For all those deals, 180 in total, the share price of the acquirer was tracked, and benchmarked against an index (MSCI World Index) which monitors equity performance across 20+ developed countries. 

The analysis found that across all regions globally, deals on average had a negative result on the equity value of the acquiring party. Buyers in North America and Asia-Pacific in particular struggled with value creation from their acquisitions. In the US and Canada, companies that were involved in a takeover or merger had a negative performance of 10.1 percentage points compared to the North American index. Asia Pacific buyers lagged 5.0 percentage points behind their regional index. 

Globally, the average stood at 5.4 percentage points behind the index. “The international M&A market as a whole is showing disappointing results, on the back of a volatile transaction climate and global political uncertainty, from trade wars to increasing protectionism,” said Gabe Langerak, a Dutchman who leads Willis Towers Watson’s Mergers & Acquisitions practice for Western Europe.Firms struggling with turning M&A deals into equity valueEurope however bucks the trend and is the only region where large mergers & acquisitions in the first quarter of 2019 had a positive impact on the stock prices (2.8%). Langerak: “The relatively stable – or less unstable – political and economic situation seems to turn out beneficial, and as a result European companies have outperformed their international peers.” It is not just a short term catch – the continent has been performing better for years, with the three-year average at 5.1% above the index. 

Striking, according to the researchers, is that international deals are outperforming national deals. For example, cross-border transactions score 0.9% higher than the index, while cross-regional deals even surpass the index by 3.1%. 

While the ‘financial’ performance of M&A deals is by no means impressive, there are however little signs of deal activity to slow in 2019. “Growing cash reserves, technological disruption and the stagnating growth of emerging markets are still pushing companies towards the M&A market,” explained Langerak. A recent report by Bain & Company found that global merger and acquisition activity spiked last year, growing from $2.9 trillion in 2017 to $3.4 trillion in 2018

The role of private equity, which accounts for a large share of deal activity, is another force lifting M&A activity. Investors are cash rich, and face pressures to spend the money in order to help their backers (mostly institutional investors and family offices) reap better than market average returns. According to one estimate, private equity now sits on $1.7 trillion of funds that is available but can’t be invested (‘dry powder’), with investors struggling with higher multiple and a limited supply of top, well priced targets. “As potential candidates now seem more expensive than during previous M&A peaks, such as in 1999 and 2008, it is more difficult than ever to close successful deals.” 

Langerak concludes with a tip for deal makers; “For M&A experts that want to make a move, it is key to focus on selecting the right acquisition candidates. Proper preparation, integration and the right people are essential to gain the right insights before taking a leap.”