3 Need-to-Know Tips for Conducting Private Equity Due Diligence

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The private equity market has undergone a critical transformation in recent years. With over $1.2 trillion of dry powder in North America and new players proliferating the market, it's become increasingly difficult to identify deals that create value. Effective and comprehensive due diligence has become a prerequisite to success. Here are three tips for private equity firms to bear in mind when conducting due diligence.

1. Look for multiple avenues of growth

The only constant is change. Time and time again, we've seen once-darling companies crumble under the threat of changing marketplaces. In today's ever-evolving marketplace, it's critical that firms have multiple areas of growth. If a PE prospect is primarily reliant on only one growth strategy, this should be a red flag. A diverse growth strategy with multiple growth arenas enables companies to weather economic downtowns and withstand the negative fallout of seasonality and other time-based effects. What’s more, when a firm has multiple avenues of growth, it enables PE firms to create value in more ways, be it selling certain assets, optimizing pricing, or altering organizational structures, for example.

2. Assess management performance

The savviest PE firms look for opportunities to acquire firms at a lucrative discount due to a factor that is not readily apparent to outsiders. One such factor is a sub-par management team. Many of the most lucrative leveraged buyout (LBO) candidates are ones that are achieving subpar performance as a result of management. In these scenarios, not only are private equity firms able to acquire the business at a discount, but they can also add significant value and improve the performance of the company. To assess management performance, PE firms will set up meetings with the management team, visit suppliers, and interview customers. Affinity's relationship intelligence platform can help PE firms identify the most effective paths to introduction. It can be surprisingly easy to spot sub-par management. Signs of hostility and resentment are difficult to keep under wraps.

3. Be comprehensive

Typically, a lot of the PE due diligence process is dictated by the confidential information memorandum (CIM). This lengthy document includes an overview of multiple aspects of a business, including the competitive ecosystem, financial data, the management team, the pricing strategy, the customer base, etc. Because the document is comprehensive, often more than 50 pages in length, it’s tempting for PE investors to rely too heavily on it. It’s critical to remember that quantity does not equate to quality. The most effective PE investors will leverage CIMs to inform, not dictate, their due diligence. Savvy PE investors will look beyond the CIM so as to identify risks and other information that are not readily apparent in the CIM. They’ll, for example. reach out to the management team, request information from customers, and conduct a holistic assessment of the market.

PE investments are complex beasts. The long time horizon associated with private equity investing requires that investors conduct thorough due diligence, evaluating a wide range of factors in order to determine how lucrative a specific investment is. By following the tips outlined here, you’ll be in a position to stand out from the masses and pinpoint the needles in the haystacks that will prove meaningful and worthwhile investments.


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