When deal making resumes, private equity players have an opportunity to earn outsized returns—as the top private equity players did after the 2008-09 recession. But finding value will require differentiated diligence. As in the last recession, there will be many smaller, messier deals—distressed assets and carve-outs. Finding “diamonds in the rough” will be even harder this time because the economic disruption caused by the COVID-19 lockdown, which makes it exceedingly difficult to find true value in a sea of noisy data.
This makes the use of advanced diligence techniques essential. In this paper we share six techniques that we have used over the past several years with the most successful PE investors. These techniques help deal makers gather intelligence that routine diligence can’t provide by seeing beyond reported numbers and expert insights to discover true sources of value (and barriers to value capture). Players that use differentiated diligence after COVID-19 can hope to match or exceed the returns that top players achieved after the last recession.
Six differentiated diligence elements for post COVID-19 M&A
1
Real-time market intelligence
Combine real-time market data sets to develop a nuanced understanding of the target company’s “right to win” in a newly defined market landscape.
2
Deep target analytics: moving beyond the trial-balance
Separate signal from noise by using transaction-level data to build a more granular view of underlying business performance.
3
Dynamic financial scenarios
Adopt a more flexible set of input assumptions, scenarios, and predictive models to drive a range of ‘what if’s’ in an uncertain recovery environment.
4
Operating model preparedness
Evaluate whether an asset’s infrastructure, capability, and available resources are sufficient to execute on a given investment thesis.
5
Digital readiness
Assess an asset’s technology and infrastructure for its strategic, revenue-enabling capabilities, rather than viewing IT as a back-office cost center.
6
Value-creation roadmap
Develop a robust implementation plan in diligence that connects the financial ambition defined in the investment thesis with the operational plan required to execute post close.
How advanced diligence in an uncertain market can lead to outsized investment returns
