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How tech is revolutionising transactional due diligence in the PE industry

Mountains of documents

The rewards on the successful completion of a transaction can be hugely beneficial for any private equity (PE) fund. However, in too many cases, inefficiencies in the transactional due diligence process can lead to increased and unnecessary risks, not only during the transaction but also after it completes. In this article I will examine the due diligence process across the financial services and PE markets and look at how technology may hold the key to a smoother pathway to that elusive successful transaction completion.

High risk – a seller’s market

PE firms must be conscious of the risks and rewards present in every transaction. This is where due diligence comes in. Transactional due diligence can be described as the act of examining and evaluating a target company’s relevant sources of value and risk – such as its financial position, personnel and cultural compatibility – with a view to achieving a successful transaction.

In this context, it’s important to keep in mind that the due diligence needs of a buyer differ greatly from those of the seller, and depending on the state of the market the level of risk can vary considerably. In a seller’s market, transactions tend to be fast-paced and deals can close with a lesser amount of information, accepting greater risk. However, a buyer’s market will tend to weigh risk with much greater care.

Though requirements may differ depending on market conditions and which side of the table you sit on, efficient and effective due diligence remains critical for successful completion. And the use of technology to streamline, manage, evaluate and structure the due diligence process has become a solid foundation upon which to build.

The future of transactional due diligence

PE firms have started to use workflow and document management software, which helps to meet internal and external requirements. However, despite significant technological advancements in the FinTech and RegTech spheres, risk assessment and due diligence for the vast majority of transactions is still done manually by teams of people. This approach is costly and hugely inefficient. Manual processes are time consuming and prone to error – especially as the industry struggles with the ever-changing regulatory environment and its requirements. Such challenges can delay or jeopardise the successful completion of a transaction and increase the financial strain on buyers and sellers alike.

For these reasons, the PE industry is increasingly turning to specialist providers, such as Lawson Conner (part of the IQ-EQ group), to deliver the necessary technological platforms and outsourced service solutions. As new technologies overtake existing processes, new skillset and infrastructure requirements are brought to the fore, which may not be held in-house. The outsourcing of due diligence can be a highly favourable option for firms in today’s market, with clear benefits in terms of time and cost savings.

At the moment, most PE firms battle with an unrelenting volume of data, challenging global environments and slow manual transaction speeds, but the same will most likely not be true in the near future. Digitalisation brings with it access to new tools created to alleviate burdens throughout the due diligence drafting, negotiation, signing and closing phases.

Let’s take the role of artificial intelligence (AI) in due diligence as an example. Deals require fast and effective analysis of reams of data. Indeed, virtual data rooms often contain thousands of documents needing appropriate evaluation. Collating all of the relevant information about a target company can be particularly challenging if it is stored across multiple locations. Moreover, the risk of human error naturally increases in line with data volume. Through AI, data can be automatically and accurately gathered, filtered and analysed at a speed that no human could attain, saving both time and money. AI can search thousands of uploaded contracts across hundreds of data points and identify any issues that may lead to a transaction becoming unsuccessful in the long run. In short, AI can minimise risk, timeframe and cost at, literally, the click of a button.

While the global economic landscape may appear challenging, the appetite for transactions seems to be growing. With much uncertainty, the need for fast, economical and accurate due diligence has never been so important. Outsourcing due diligence to technologically savvy experts is a sensible consideration for many firms, and can only increase the likelihood of transaction success.

Get in touch with Tom

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