November 17, 2020

Private Equity Dealmaking and Due Diligence Strategies in a COVID-impacted, Post-election 2021

By Jeff Golterman, Sr. Director of Product Marketing, PE Segment Lead

COVID-19 will continue to impact private equity dealmaking and due diligence strategies well into 2021, according to panelist insights and audience polling during our recent New Strategies for PE Dealmaking and Digital Due Diligence panel.

We hosted Josh Hausman, Managing Director, ONEX, Andrew Kaplan, Principal, Bain Capital Private Equity, and Garrett Black, Manager, Custom Research, PitchBook, to discuss strategies for restoring portfolio company health, digital due diligence, and where best to deploy dry powder in a post US election and COVID-19 impacted environment. Discussions and audience polling saw three key recommendations emerge.

1. Re-assess COVID impacts on portfolio company balance sheets frequently while avoiding inflexible debt structures.

Sponsors continue to shore up portfolio company balance sheets. Bringing costs in line with COVID-impacted consumption, the raising of additional funds and further restructuring continue as top tactics. A minority of the audience cited their “portfolio is healthy” as well as the use of “other“ tactics including SPACs and PIPEs.

Before further deploying capital, Josh Hausman suggested that “dealmakers should anticipate duration and severity of future COVID waves, factor in US election impacts and subsequent stimulus packages and assess the permanent affects that COVID-19 will have on target sectors.”

Andrew Kaplan added that it’s important “to understand normalized consumption in order to assess if cost structures are in line with what initiatives will drive sustainable growth, or to determine if further investments are required.” As sponsors look to deploy further capital either via equity vs debt, Garrett Black pointed out that ”given COVID uncertainties, companies are giving themselves a greater margin of error, and driving down the % of debt vs. equity to avoid the inflexibilities of debt structures. This is especially important as multiples have softened a bit.”

2. Sector specialization, tools and partners that support your firms buy-side processes will best accelerate due diligence.

Panelists discussed how PE buy-side due diligence will continue to evolve with a focus on how to identify first what slows due diligence the most. Audience polling suggests incomplete or inaccurate deal documents are the top culprit. Josh Hausman suggested that “industry specialization enables you to focus due diligence on essential areas, and advance preparation enables due diligence to move quickly. This enables company executives to work more efficiently and builds competitive advantage for the firm."

What about the use of due diligence partners – do they slow due diligence? Andrew Kaplan suggested “selecting true partners is essential” and why staying aligned and avoiding miscommunications are key ingredients in working with them more efficiently.

With the costs of due diligence averaging high five to low six figures, many leading firms are building “digital due diligence” prowess both internally and through partners with the goal to further shrink due diligence cycles and costs. But which set of digital advances should PE firms best employ to speed due diligence?

Our audience conveyed how “tools to speed findings reporting among deal teams, partners and advisors” rated highest. This aligns with recent Datasite research where PE dealmakers are most often using a seller/seller advisor provided data room vs. a true buy-side application.

Audience polling went on to rate highly the need for “a due diligence app that models our firms’ best practices, checklists, trackers, etc.” The panel agreed that “the way a firm performs due diligence is part of their competitive differentiation.”

Uses of artificial intelligence to analyze deal documents and analytics to speed due diligence was also rated highly by the audience.  Andrew Kaplan further discussed the importance of analytics by sharing how “in the last 3-4 years, leading due diligence partners have made greater use of analytics to help us make sense of unstructured deal data.“ Josh Hausman also added that “we do rely upon our partners to use technologies such as AI and analytics that best help us ascertain risks in areas such as cybersecurity, or ESG”.

While seemingly obvious, using Zoom or MS-Teams for meetings has become the new standard. However for new deals and relationships Hausman sees that “we will still need to be willing to make those trips again for the face-to-face meetings. You’ll never have the same conviction in due diligence vs. a competitor that has made that trip.” 

3. Focus on subsectors where you have strong convictions, use scenaric thinking, assess COVID-19 impacts both as a driver and an inhibitor, and recognize market resiliency. 

How will COVID-19 and US election results impact where to best deploy dry powder? At the end of 2019, according to Garrett Black of PitchBook, "PE sat on $1.1Trillon in dry powder,” and given the later-year vintages of most of it, plus that fact that almost $1.26Billion in incremental dry powder was added in 2020 YTD, “we will see due diligence and dealmaking renew quickly into 2021.”

A majority of our audience plans to deploy dry powder where resilience to COVID is proven, while many are staying the course with current investments until more data emerges.  A smaller percentage of the audience is investing in sectors expected to emerge from COVID and in smaller deals. 

Looking ahead and factoring in election outcomes, Josh Hausman suggested that “regardless of the election outcomes, those companies that can demonstrate high quality and low cost, regardless of the political environment, will be rewarded.” He further suggests to “focus on subsectors you believe in for the future, and be prepared to demonstrate added value post transaction”.

Andrew Kaplan wrapped-up with: “add scenario planning with guardrails to your due diligence, and be mindful not to get into a doom cycle during these challenging times. The market, despite COVID-19, has proven to be quite resilient."  Garrett Black wished to leave the audience with the suggestion of "being mindful to leverage the bullish indicators for PE going forward and to give consideration, while assessing COVID-19 impacts, it’s abilities to both accelerate and decelerate financial results."

For more panelist insights, listen to the webinar replay on PE Dealmaking and Digitial Due Diligence for 2021.

Click here to schedule a demo to learn more about how Datasite helps private equity dealmakers accelerate buy side due diligence.

New Strategies for PE Dealmaking and Digital Due Diligence

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Key PitchBook and Datasite insights for dealmaking and digital due diligence for 2021.

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