The diligence process can be prohibitively expensive for fund managers and often lacks a structured approach.
High diligence costs can directly impact the P&L of a fund manager if the transaction fails to materialize, or affect the fund carry if costs are passed on to the BidCo in a successful transaction.
Here are some strategies for managing diligence costs:
- Refine the scope of work to focus on key elements of the investment hypothesis, avoiding exhaustive searches for minor details.
- Request periodic budget updates from advisors to address cost overruns promptly. Flag out-of-scope expenses immediately.
- Ensure advisors do not waste efforts on issues where deal teams already have a detailed understanding or have formed a viewpoint.
- Incorporate phased diligence, particularly in auction processes, to prioritize key areas of investigation
- Instruct advisors to communicate information in a timely manner, including risk descriptions, value at risk, probability, risk priorities, and recommendations.
- Seek consensus before communicating the team’s views and positions with advisors
- Reduce the frequency of update calls, ad-hoc emails, and interim draft reports wherever possible
The diligence process followed by fund managers globally, regardless of their size, has not significantly evolved in the last few decades.
Increasingly, fund managers are looking to adopt technology to enhance their diligence process and manage diligence costs.
What strategies do you employ to streamline diligence processes?