The 2021 Private Equity International (PEI) Operating Partners Forum uncovered best practices in private equity portfolio operations and value creation across all functional business areas. When it comes to pre-deal operational due diligence, the experts agreed on three essential practices.

Key Takeaways

  • Speed wins now more than ever as operating partners are feeling the pressure to do more and deeper due diligence in shorter timeframes and amidst increased competition.
  • The most important areas for due diligence have shifted with supply chain considerations and human capital assessments chief among them.
  • Value creation plans are receiving more attention earlier in the process as operating partners size up what they can accomplish in the first 12 months.
  • Data quality and evaluation are essential to deciphering between COVID-related outliers in performance (positive or negative) and legitimate longer-term trends.

Speed, Focus, and Value Creation Are Critical to Deal Evaluation

TBM had the honor of moderating a panel discussion on the critical dimensions of pre-deal operational due diligence at the 2021 PEI Operating Partners Forum. The executives who spoke with us concurred that the concept of diligence is the same as always. But the urgency is elevated and the intensity is up 10-fold.

Operating partners agreed on three must-dos for the pre-deal phase:

1. Start sooner and accelerate. With timelines compressed and the playing field more competitive, operating partners are starting due diligence earlier to get an edge. However, they often find themselves working in intense competition with other players.

Companies are actively seeking help from their vendors and partners, but many are running into roadblocks with bandwidth. Service partners who can push the pedal down to quickly work through specific areas of analysis, such as Quality of Earnings (Q of E), IT analysis, or a human capital assessment, are invaluable in helping expediting decisions. Breaking due diligence work into phases and focusing first on key considerations for investment are other key tactics.

2. Focus efforts in the right areas. Supply chain considerations have jumped to the forefront of the operational due diligence agenda. Because this areas is not as straightforward as it once was, it requires a deeper level of analysis and consideration, all in a shorter timeframe.

Human capital assessments are another hot topic as operating partners look to understand team dynamics and how organizations operate under stress. Other critical and emerging areas for due diligence include technology, ESG, and cyber security.

3. Prioritize value creation. Questions around value creation that used to be asked much later in the process are now being asked during earlier phases of due diligence. For example, operating partners are looking at the quality of the salesforce and the company’s level of investment in the sales team.

They are also giving more forethought to their 100-day plan or value creation playbooks: Plans must be ready on day one to drive as much value as possible during the first 12 months

Of course, the value creation is complicated by the “COVID bump.” Operating partners must thoroughly consider whether recent increases are sustainable, or if they will soon revert to normal levels. Dividing data into four categories: financial, commercial, operational and people, expedites assessment. Firms can review data in each area then decide if they can use it for value creation decisions or if they  need to prioritize additional data collection in one or more areas. 

Operating partners are pulling whatever levers they can to master the increasingly intense due diligence effort.

The pressure is on when it comes to rapid, effective due diligence. With higher stakes, many operating partners are more deeply entrenched in the work, They are also keener to leverage strategic partners to expedite process and ensure accuracy.  For more on this topic, download our recent article, “Uncover Hidden Opportunity and Mitigate Operational Risks Faster.”