What does good look like for critical M&A due diligence findings?

What does good look like for critical M&A due diligence findings? Top Concerns for M&A Investors on the Buy Side

I have had hundreds of conversations with leading PE fund managers – on both sides of the Atlantic – to understand how they handle DD findings on their M&A deals.

Deal teams have to navigate a number of challenges in managing risk data on their M&A deals:

• senior team members don’t usually have the time to review lengthy DD reports in their entirety;
• there are challenges with the information flow when sharing key risks with decision-makers who sit outside of the deal teams – including the “Heads of” (e.g., legal, tax, ESG, risk, etc) and Investment Committee members
• delays in sharing data with decision makers impacts how quickly deal decisions can be made, including: go/no-go decisions; valuations; and what sort of terms the deal team needs to try to extract with the seller(s);
• there is not usually a central repository for the deal team, and each of the advisors to be able to see, categorize and share their views on risks that others have identified; and
• despite the huge amounts invested in DD, the risk data that has been bought and paid for (usually in the form of lengthy reports) is rarely catalogued, stored and leveraged for learnings that can be applied to future deals.

PE investors commonly distil lengthy DD reports into internal lists of key risks and mitigants. Those lists usually then form the basis for submissions to their IC.

I am curious to see when the PE industry will have its 'Ah Ha' moment around risk management. The hedge fund industry experienced one when it recognized that every second matters, leading to high frequency trading infrastructure sitting within exchanges.

It will be interesting to see if / when PE teams start to place more emphasis on the speed of surfacing and sharing key risk data and turning them into actionable insights.

In due course, it is easy to imagine that AI could be harnessed to help PE teams track and assess every risk and create recommendations in relation to them. In the meantime though, Excel remains the tool of choice for deal teams.

While Excel is a powerhouse and can (sometimes) work adequately for these purposes on simple deals with limited diligence, using it to track deal risks in the 21st century is like trying to navigate using a paper map.

I’d love to hear your views on M&A due diligence and risk management. Feel free to share your views in the comments or reach out to me directly.