For years private equity, venture capital, and angel capital was free flowing, and founders had easy access to a wide range of funding options. Covid-19 changed the world in different ways, including driving a regime shift in private and public equity markets. The shift from a near zero interest rate environment to a near 5% target rate for the federal reserve has been swift and sudden, driven by record levels of inflation over the last few years. This has led to the emergence of cracks across all types of portfolios, small or large, institutional or retail. It has also resulted in a sharp slowdown in new fund deployment, down by 67% from 1,464 funds in 2021 to just 481 funds in 2022. More importantly, performance of existing portfolios has declined sharply, resulting in investors having to rethink their due diligence process.
Taking it easy:
With liquidity on tap and private equity investors having enjoyed market beating returns for several years, the due diligence process was bound to become less strict. Investors started increasingly relying on a basic level of due diligence, given lack of available resources and unseen levels of competition for good investments. Most investors just followed the other larger and more experienced investors, taking their word for validating the promised returns. This is now changing, and fast. Investors have now realized the need for going back to stricter due diligence, as a highly effective tool for addressing portfolio underperformance. This is also evidenced by the slowdown in new fund deployments and investments, as investors take more time in investigating all the nitty gritty of potential deals.
Good, cheap, and fast – pick two:
Due diligence comes in all shapes and forms. A golden rule of project management says that you can have something good, cheap, or fast, but you can only pick two. The rule also applies for all forms of due diligence; operational, financial, or commercial. An example of cheap and fast due diligence is when investors follow the actions of other big investors, based on the assumption that they must’ve done good due diligence. FTX, Carvana, Fanatics, and Kraken are on the list of such deals which have gone bad, mostly executed after a round of cheap and fast due diligence. This is changing now, with investors spending a lot more time and effort on due diligence of potential investments, ensuring they are aware of all potential risks prior to executing.
We take due diligence seriously:
At Balance Consulting, we have a team of experienced professionals who understand the criticality of applying thorough due diligence prior to deal execution. With experience across financial, operational, and commercial due diligence process, our team can help you avoid all the common pitfalls in a due diligence process. From deep diving into the financials and accounts, to helping validate the business strategy and business plan, we can help you develop a thorough understanding of the target. We also help you throughout the deal cycle, from pre deal due diligence to post deal portfolio company reporting, ensuring you spot risks before they become issues. Our structured and dynamic deal tools will help you dive into all of the key areas during the due diligence phase, helping you focus energies and resources towards having the right discussions.