July 4, 2023 - by Synoptek
A lot has been said about digital transformation in the last few years. Yet, in the Private Equity (PE) space, there’s a lot more organizations can capitalize on. Although most PE firms recognize the value of mature digital investments at a portfolio company at the exit, read on to uncover the top three technologies PE firms must invest in to drive effective digital due diligence.
Why Is Technology Due Diligence a Critical Priority?
PE firms are witnessing a range of challenges in their day-to-day operations. From increased competition to unprecedented levels of macroeconomic uncertainty, only those that act with speed (and certainty) can weather the storm. The opportunities digital technology offers across efficiency improvements, revenue growth, and high exit prices are known to every PE firm. But what many don’t realize is the value digital technology offers in the due diligence stage.
In this volatile environment, embracing technology can enable PE firms to make the right investments and execute deals at pace. With the help of technology, PE firms can examine their portfolio companies better, determine which investments make the most sense, and prioritize opportunities based on value potential. In fact, digital due diligence is an essential first step PE firms must take to recognize portfolio companies that possess the highest potential for value creation.
Technology due diligence offers much-needed support to guide acquisition and value-creation decisions. Using technology, PE firms can:
- Explore intelligent insights from a wider range of data sources and make sense of increasingly unstructured datasets.
- Get visibility into the potential risks and issues different organization might face.
- Keep up with market trends and stay ahead of peers, especially as competition for deal flow intensifies.
- Eliminate time-consuming, costly, and error-prone tasks across due diligence and valuations.
- Automate complex workflows, sift through millions of datasets, and enable investment professionals to identify and seize opportunities quickly.
- Get quick access to ready-to-query data without wasting time searching, extracting, and transforming information.
- View a broader picture of potential opportunities and create robust roadmaps with a 3600 perspective.
Top Technologies to Invest in for Effective Due Diligence in Private Equity
Using technology in the due diligence phase can open doors to growth opportunities for PE firms. But knowing which technologies to invest in is also important. If you want to uncover opportunities, identify risks, and multiply value creation, here are three technologies you must invest in for effective technology due diligence:
1. Artificial Intelligence (AI Due Diligence)
In the due diligence phase, Artificial Intelligence (AI) can help make the right investment decisions. AI can offer a comprehensive perspective of the target company’s operations, risks, and market standing. This data can assist you in assessing the performance of the portfolio firm, identifying areas of strength and weakness, and evaluating brand competitiveness. By analyzing data from various sources, AI can accelerate due diligence in private equity while reducing the risk of investment failure.
For example, using AI, you can determine if a company is worth investing in, in just a matter of a few seconds, with higher accuracy and detail than a human analyst. AI models can also help refine results based on market changes, trigger alerts when companies match the criteria, and identify potential targets.
2. Automation (Automated Due Diligence)
Another technology that can really transform due diligence in private equity deals is robotic process automation (RPA). Automation via RPA can enable higher levels of productivity and efficiency, enabling you to make quick and intelligent investment decisions. You can use RPA to identify and screen fast-growing businesses, determine opportunities for value creation, and quickly spot potential deal-breakers and commercial risks.
For example, automation can replace manual compliance processes, allowing you to track emerging regulations in a streamlined fashion. Automated systems can also monitor portfolio businesses’ compliance standing and track their ability to adapt to the evolving regulatory and legal landscape.
3. Analytics (Data Analytics Due Diligence)
With each passing year, the amount of data created by PE firms is growing steadily. Reports suggest this data will reach 148 zettabytes by 2024. Data Analytics can help analyze and process increasing volumes of unstructured data quickly and efficiently. It can help PE firms quickly identify opportunities and raise money. It can also help them keep up with unprecedented market disruptions inside and outside the portfolio.
For example, you can use analytics to analyze internal and external data and continuously predict, assess, and manage operational risks within the portfolio. Analytics can also help you accelerate the due diligence process in tight timelines and catch red flags more easily.
Enable Long-term Value Creation
PE firms are constantly looking to make the right investment decisions. But conducting extensive research and evaluating deals while identifying and prioritizing risks and enabling growth isn’t easy. Technology can play a huge role in the due diligence phase to inform PE value creation and achieve next-level performance.
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