Private equity’s due diligence timelines can vary depending on various factors. These include the complexity of the deal; the size of the investment; regulatory requirements; and, the thoroughness desired by the investors. In recent years, there has been a trend toward more comprehensive due diligence, even before the execution of an LOI (Letter of Intent).
This trend is driven by several factors:
- Increased Complexity: Deals are becoming more complex, involving multiple jurisdictions, regulatory compliance issues, and intricate financial structures.
- Risk Mitigation: Private equity firms are increasingly focused on mitigating risks associated with their investments. In years past, frothy (price competitive) markets were marked by somewhat excessive multiples. Too many of these deals did not generate expected returns.
- Regulatory Scrutiny: Regulatory requirements have become more stringent in many jurisdictions, particularly in areas such as anti-money laundering (AML) and know your customer (KYC) compliance.
- Market Competition: PE firms may conduct deeper due diligence to gain a better understanding of the target company’s operations, market position, and growth potential compared to potential competitors.
- Focus on Value Creation: Increasingly focused on value creation strategies post-acquisition, thorough due diligence helps identify opportunities to improve operational efficiency, drive revenue growth, and enhance overall value.