Private equity due diligence is an important process for identifying and mitigating risks when pursuing acquisitions or co-investments. It covers everything from legal aspects to IT systems and operational processes. In addition, it is essential for analyzing the company’s financial health and uncover opportunities for post-acquisition value creation.
Due diligence is critical for both GPs and LPs in the PE space, but with a different focus: whereas GPs conduct rigorous financial, operational and market due diligence on potential investment opportunities, LPs typically take a more strategic approach, evaluating how the opportunity aligns with their existing portfolio investments and how they can leverage the target’s assets to maximize returns.
Private Equity Due Diligence: Key Factors Investors Should Consider
For PE firms, thorough due diligence is also key for understanding the target’s market position and assessing its growth potential. This is done by examining the industry’s competitive landscape, key players and technology trends as well as evaluating key industry ratios like working capital cycle and debt/equity ratios and conducting Monte Carlo simulations. It is also common for PE firms to retain industry experts or consultants during this phase to fill in knowledge gaps.
However, with many private companies still run by founders or family members who are heavily involved in day-to-day operations, it can be challenging for them to find the time and resources required to participate fully in due diligence. Often, they are inundated with communication and requests from their own major clients and suppliers, competing for their attention with those related to the due diligence process. This is where a comprehensive due diligence platform comes into play. By simplifying the process, it becomes easier for both parties to participate. This is why FirmRoom designed our solution to be intuitive and accessible, even for company owners inexperienced with due diligence.