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Intelligent automation and future of due diligence for private equity

The standard due diligence traditionally carried out by private equity firms is, under normal circumstances, usually adequate – but we no longer live in normal times. Unpredictable disruption can seriously impact a deal both pre- and post-acquisition, and it is up to the PE firm to bring in a more advanced level of analysis – not necessarily to try to predict whether disruptions will occur (they will), but rather, whether the acquisition target can overcome the effects and coming out the other side a winner.

The problem many PE firms face is that their portfolio companies lack timely, accurate data and as a result they are missing out on opportunities to leverage information to gain a competitive edge in their due diligences. Without a robust foundation of data analytics and intelligent automation, it becomes difficult or impossible to make fact-based decisions.

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Intelligent automation reduces risks and enhances confidence through better decision making

Intelligent automation brings a more holistic solution to the due diligence equation by bringing in end-to-end digital transformation, which results in acceleration of processes and deeper levels of knowledge and insights. This enables positive disruption and better productivity. Intelligent automation is not a single piece of software or a single platform, rather, it leverages data analytics and AI to make automated, and more intelligent decisions. The private equity world is only just now beginning to leverage intelligent automation, and the results are very positive in allowing them to better gather intelligence on companies and sectors. Specifically, PE firms can use intelligent automation to:

  • Identify and screen fast-growth businesses
  • Determine with confidence where opportunities for value creation lie
  • Quickly identify potential deal-breakers and commercial risks

Intelligent automation, while relying on a technological framework of analytics and AI, depends primarily on identifying and leveraging data.

A more holistic, agile approach to decision making

Private equity operators today must account for unprecedented, fast-developing market disruptions as well as transformation inside the portfolio, making it difficult to achieve agility and desired returns. Intelligent automation is being used to develop risk management solutions that are enhancing resilience and improving competitiveness. The best decisions are made when PE firms analyze not only internal data, but external as well, and that external data is much more than rows of numbers. For example, if the target company has a supply chain that includes countries within the ASEAN, data may include regional political struggles, weather patterns and items in local news reports that may not make it into Western media. Much of this type of unstructured data is available on-demand through public data sources, market subscriptions, online news sources and social media, the latter of which may identify underlying sentiment, political headwinds or resistance that may seriously impact the supply chain. An increasing number of tools are becoming available in the market especially for supply chain/procurement monitoring, supplier financial risk assessment and other geopolitical risk, and to supply news assessment for real-time insights. The key is to build a framework to continuously predict, assess and manage operational risks within the portfolio.

The smarter approach to identifying and driving value creation

The COVID-19 pandemic has highlighted the importance of using intelligent automation and data analytics to model a range of scenarios in due diligence to prepare for the unexpected, and in the future, due diligence will go beyond the numbers to factor in unpredictable disruption and unexpected developments – and how well a target company is able to prepare. For example, in the current crisis, identifying how resilient a target would be to weakening of the supply chain would be of paramount importance. Due diligence should identify not just how well a company has performed in the past and how well they will perform in the future based on the numbers, but how well they can deal with unraveling global markets. Intelligent automation will help private equity companies manage their portfolio companies better, perform smarter due diligence, and diagnose and mitigate problems in real time.

If you would like to discuss any of the points raised in this article, please email info@mainepointe.com for a conversation with a member of our Private Equity team.

Topics: Private Equity Operational Due Diligence AI