New research from West Monroe: Private equity firms will change due diligence process to be more focused on data, value creation

Survey of 100 industry leaders shows 68% will use more technology-based tools, vs. people, to conduct diligence on targets

CHICAGO—West Monroe, one of the fastest-growing digital firms, today released its latest signature research report, “The Future of Diligence in Private Equity.” The report analyzes survey responses from 100 private equity leaders on the state of due diligence today along with their expectations—and predictions—for the future. 

The primary finding: Private equity is shifting focus away from risk mitigation and toward identification of value creation opportunities during diligence on potential targets. Indeed, when asked what they anticipate will be the primary drivers of change to diligence in the next 1–3 years, respondents’ clear top answer was a higher focus on value creation vs. risk mitigation (73%), ahead of regulations (54%) and ESG standards (25%). 

The shift, in an effort to address competitive bidding dynamics and higher valuations, will come with change: 

• 70% say they’ll use more data during the diligence process and 68% say they’ll use more tech and tools, vs. people

• Two-thirds say they are more likely to buy targets in the future that have completed sell-side diligence

• 27% say that “recommendations aligned to the investment thesis” is most the most valued part of diligence today, but 40% say it will be the most valued part in the future

The survey also asked private equity leaders about ESG. While 67% of respondents say their current approach to ESG diligence is consistent across targets, only 40% say they will maintain that consistency in the future—choosing to, instead, more often customize ESG diligence by the type of target.   

Regardless of the type of diligence, less than half of private equity leaders say they often incorporate diligence outputs and recommendations into the value creation plan over the hold period. That represents a huge opportunity as PE firms increasingly rely on value creation to justify higher multiples.

“The transfer of knowledge from the deal teams to the operating teams, with intelligence and recommendations from the diligence report, isn’t happening as often as it should,” said Brad Haller, senior partner in West Monroe’s M&A practice. “But translating findings into action is a critical step for financial sponsors to get the most value out of the diligence effort”

To adapt to a diligence process that requires more data, technology, and automation, PE firms need to take critical steps to modernize and innovate within their deal operations. 

“As serial acquirers, PE firms are experts in due diligence, but they’re also known for prioritizing investments in their portcos over their own processes and skillsets,” said Keith Campbell, senior partner in West Monroe’s M&A practice. “We are just starting to see the tide turn with regard to investing in digital, analytics, and labor productivity to evolve their diligence capabilities and address the current diligence market pressures.”  

“The Future of Diligence in Private Equity” surveyed 100 private equity leaders via an online survey in Q4 2021. The report analyzes the survey responses and offer steps PE firms can take to modernize diligence and focus on value creation. West Monroe is a market-leading advisor and longtime partner to the private equity industry, working regularly with 40 of the top 100 PE firms across the transaction lifecycle, from diligence to value creation to sale.  

About West Monroe
West Monroe is a digital services firm that was born in technology but built for business—partnering with companies in transformative industries to deliver quantifiable financial value. We believe that digital is a mindset—not a project, a team, or a destination—and it’s something companies become, not something they do. That’s why we work in diverse, multidisciplinary teams that blend management consulting, digital design, and product engineering to move companies from traditional ways of working to digital operating models—and create experiences that transcend the digital and physical worlds. Connected by the 13 founding values that drive our culture, our 2,000 employees work collaboratively across the firm with the belief that our clients’ success is our success. Visit WestMonroe.com to learn more.

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