Robust due diligence processes, both investment and operational, are a critical part of successful fund/manager selection, an aspect of private equity that changed during the pandemic.

The most obvious impact is from travel restrictions preventing on-site, in-person due diligence meetings. Investors are aware that reviewing track records and strategy can only provide a certain amount of comfort. A large part of the investment consideration is around the people, team dynamics and culture.

There is a lot that can be gained from seeing how a team interacts with each other, when visiting a private equity firm’s office – it is often the smaller clues or comments before and after the formal meeting that provide the most insight. Forming a view over a conference call with the team in multiple locations is hard: there is a lack of “vibe” and nuance that can only be gleaned when in-person.

Due to Covid, this important piece of the due diligence evaluation has not been available and at best is likely to be limited in the near-term. During these times, the tendency might be to focus on GPs already known to the investor, where the investor has been able to meet the team and assess their dynamics, culture and understand any leadership transition. 

Because of travel restrictions, those who have an industry network, as well as a global network of trusted advisers and partners have an advantage in terms of their local presence and the insights and ability to react. 

The crisis put a spot light on ongoing due diligence. Communication between GPs and investors has increased as a result of the pandemic, with more regular updates, increased volume of information provided in data rooms and virtual due diligence sessions or webinars. This additional insight has undoubtedly helped the investment thought process, with more “desk-top” due diligence available.

Coronavirus has challenged many business models, so it is critical that private equity sponsors analyse where they can add value and assist the management, in terms of operations, financing, people and markets.

Source: Private Equity Wire

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