Due diligence in the private equity market

Sound due diligence has long been an important part of private equity dealmaking, but its boundaries are now shifting.

The process in the private equity market is now becoming a lot more sector specific, says Francis Prosser, partner at strategy consultants Sempora.

Prosser comments, ‘Investors seem to be looking at issues in much more detail; they will be following a particular line such as a specific driver of profit or growth.’

He sees market and commercial due diligence nowadays as an extension of the historic “market appraisal”, an investigation into the finer details of where the particular market is heading and what its growth opportunities are.

‘The fundamental difference now is that we are often in markets that are mature or stagnating as a whole, so what investors are looking at is niche growth or focusing much more on distinctive competencies of a company,’ Prosser explains.

He argues that private equity companies are now more ‘clued up’ and in turn are becoming more demanding in relation to what they look for in a due diligence process. The detailed nature of questions being asked by private equity firms has forced advisers to seek out specialisations.

 ‘Increasingly, people are looking for due diligence providers who have some kind of specialisation or access to the necessary expertise. This expertise can be as specific as a product strategy such as a drug sector like smoking cessation, or the niche end of a market, such as steak restaurants,’ he explains.

Prosser reveals that he has been involved with more trade investors in the past couple of years as private equity claimed a lesser share of the M&A market.

‘I think private equity is behaving slightly more like trade investors; they want to understand the business in much more detail, and work with them on strategy,’ he adds.

‘There is always a requirement to ensure a quick turnaround on a due diligence process,’ comments Prosser, ‘but investors are increasingly prepared to take longer to understand the risks involved.’

‘Good due diligence will inform the strategy to some extent, rather than just rubber-stamping it.’

With investors looking to exit the investments that they have held on to for longer than the traditional five- to seven-year cycle, bolt-on acquisitions, as well as market development and geographical roll-out, are strategies that Prosser sees as on the up.

It’s not a subject that makes the headlines, he says, but is all part of the market and commercial due diligence that is taking place.

‘If a trade buyer or private equity house is looking to grow a business through a series of acquisitions, it is a case of identifying whether the market can support that move and who the players who might potentially have a fit with the operation are.’

Prosser sees it as a form of strategic development and believes that this approach is driving the need for specialist due diligence providers.

Sempora specialises in consumer-facing businesses such as retail, travel and tourism, industrial companies and the healthcare/pharmaceutical market. It recently advised on the development capital investment in musicMagpie.co.uk

Article by Francis Prosser
Managing Director
Sempora Consulting

Hunter Ruthven

Hunter Ruthven

Hunter was the Editor for GrowthBusiness.co.uk from 2012 to 2014, before moving on to Caspian Media Ltd to be Editor of Real Business.

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Due diligence