Differentiated diligence after COVID-19

Differentiated diligence after COVID-19

How advanced diligence in an uncertain market can lead to outsized investment returns.


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Differentiated diligence after COVID-19 - covid-19-financial-resilience-texture

COVID-19 has brought much of the global economy to a halt, drastically reducing revenues, wiping out profits, and setting off a scramble to shore up liquidity. Private equity investment teams have pivoted away from M&A to focus on stabilising their portfolio companies and preparing them for an impending recession.

But the shutdown is beginning to loosen and PE players will start assessing the landscape again, hoping for the kinds of returns that the smartest investors realised by placing bets early in the recovery from the 2008-09 recession. Like last time, when M&A restarts, the choices are likely to be limited and most assets will be troubled—nobody wants to sell at the bottom if they don’t have to.

Complicating the challenge is the unprecedented nature of the COVID-19 recession. Nobody has seen such a sudden seizing up of the economy. Nobody has seen such a rapid rise in unemployment. All the normal metrics buyers use to vet an asset—macroeconomic factors, market growth, competitive landscape, growth drivers, etc.—are suddenly out of date or unreliable. Nobody knows how long and deep the recession will be. Or how customer behaviour may permanently change.

This is why using sophisticated data analytics and probing beyond standard metrics of value—differentiated due diligence—is more important than ever. Even when the M&A market was at its cyclical peak, it was clear that the traditional tools used by many due diligence teams were no longer adequate. To identify value—and justify heady multiples—smart buyers knew that they had to get behind the numbers, develop original market insights, and understand the strengths and weaknesses of a target’s operating model.

Read our latest Differentiated Diligence report, where we share six essential tactics for successful due diligence in a post COVID-19 world.

Using these proven approaches, PE investors may have a better chance of finding true value in the assets that will come to market in the next year or two—and capturing the outsized returns that top-performing funds reaped coming out of the last recession.

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