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.