Digitizing PE Due Diligence (Part 2)

The digital revolution in private equity has become a hot topic across the industry recently, as firms invest in tech capabilities to drive efficiencies even outside their tech portfolios. Leaders in the deployment of AI, machine learning, data collection, analytics, and automation have achieved a competitive advantage over their slower peers. A variety of functions are improved by enhanced tech, including fundraising, deal sourcing, due diligence, and operational support for portfolio companies.

Simply acknowledging the importance of digital transformation is one matter, but firms must actually determine how and where to allocate resources to these capabilities to deliver the most value. Due diligence is an underrated function in which tech deployment can deliver tangible returns and PE management should seriously consider the benefits of increased investment here.

Due diligence is not the most thrilling or captivating part of the PE investment process, but it’s an absolutely essential one. Firms have invested in digital transformation elsewhere, and those improvements are bearing fruit. There’s been a proliferation of software that enables process automation, enhances deal flow, and improves operational efficiency. Analytics have been tapped to accelerate growth and minimize customer acquisition costs. Returns on digital investment have been clear in these functions, but the industry has been slower to focus on due diligence. This might be a costly oversight.

Due diligence can be a fragmented process that pulls together disparate pieces of documentation and creates tasks for stakeholders from numerous organizations. These complications cause delays and increase expenses, but to date, there have been no simple solves. This is precisely the sort of problem for which software and process automation could become valuable tools to enable collaboration. A digital portal for document uploading, data review, workflow guidelines, and deadline setting would be a tremendous resource for all stakeholders that would reduce the time spent waiting and wrangling information, while also aligning everyone’s behaviors with the firm’s financial goals.

Collaborative software will be even more important as remote work remains permanently more prominent after COVID-19 restrictions fade. Accompanying cybersecurity to protect sensitive documents is a necessity as well. Ultimately, improving the tech in due diligence would allow more deals to get done, reduce administrative expenses for each engagement, and improve workflow.

Data collection and analytics also offer value in the realm of investment analysis. During due diligence, customer and employee survey data allows PE firms to understand what’s driving customer behavior. Funds with better data capabilities will benefit from insights on sales growth, inventory management, and demand forecasting. If you’re able to improve financial projections and identify potential efficiency improvements, these can be built into the investment thesis as opportunities to augment returns.

Finally, becoming a leader in digital diligence should make it easier to attract capital. LPs like to know that they are investing in forward-thinking and highly efficient funds. All else equal, firms with the best tech capabilities are more likely to be stable over and deliver higher returns for investors.

In sum, tech-driven efficiencies and capabilities improvements in due diligence offer substantial benefits to PE firms. Collaborative software, cybersecurity, and data analytics could all be deployed to reduce expenses, catalyze higher deal volume, improve the quality of investments, and even attract more capital. Other functions are certainly worthy of the resources required for digital transformation, but due diligence warrants consideration as well.