28 March 2024
In the world of private equity (PE), due diligence stands as a critical cornerstone of investment success. This meticulous process, vital for uncovering the potential and pitfalls of investment opportunities, involves navigating through a complex maze of financial, operational, and regulatory landscapes. Yet, it's fraught with challenges that can sway the outcomes of multimillion-dollar decisions. This article explores the obstacles and research difficulties faced by PE firms in due diligence, providing insights and solutions to overcome these challenges effectively.
This challenge stems from the dense market environment filled with potential but not always transparent options. Failure to effectively identify and evaluate these opportunities can lead to missed investments with high return potential or, conversely, investments in underperforming assets. Such missteps not only impact on the financial performance of the firm but also its reputation and investor confidence.
Upon finding the right target company, accurately valuing target companies is another follow-up challenge for PE firms. Misjudgments in valuation can lead to overpaying for acquisitions or passing on potentially lucrative investments. The intricacies of financial modeling, market volatility, and sector-specific trends compound this difficulty, requiring deep analytical expertise and industry insight. An inability to navigate these valuation complexities can significantly affect the investment's return.
Each target company presents a different dynamic environment with various factors from industry-specific features, regulatory changes, and technological advancements that can swiftly alter the attractiveness of investment opportunities. Firms that struggle to adapt may miss out on emerging opportunities or hold onto declining assets, significantly affecting their competitive edge and investment returns.
The data collection process, whether through desktop research or purchasing reports, is time-consuming. Once data is gathered, benchmarking between firms demands the meticulous collection and analysis of vast amounts of data to accurately position target companies within the competitive landscape. Neglecting to conduct thorough data collection and benchmarking can lead to misinformed investment decisions. meticulous collection
From global trends such as electric vehicles, smart farming, sustainable products to AI text generators, non-currency blockchains, and VR/MR/AR, grasping these trends is essential for PE firms to ensure their portfolio companies remain competitive and adaptable.
Solutions for these pain points include building strong industry networks for insights and deal flow, using third-party advisors or experts for specialised due diligence and valuation expertise, adopting AI to locate investment opportunities and streamlining repetitive tasks like data aggregation and analysis. Strategic partnerships can also provide competitive intelligence and benchmarking capabilities, while leveraging financial technology solutions enhances data analysis and valuation accuracy. Nevertheless, these solutions often take months or years to generate reliable results. Building strong networks and partnerships takes time and effort. The same goes for building internal AI tools that may take too much of a private equity’s resources, especially if it is a boutique one.
Another cost- and time-efficient solution is to utilise a data platform. A data platform can significantly alleviate PE firms' due diligence pain points through comprehensive access to market, financial, and operational data. For identifying investment opportunities, it offers filtering tools to sift through potential deals efficiently. When valuing companies, such platforms provide historical data, industry benchmarks, and valuation multiples to enhance accuracy. Navigating market landscapes becomes more manageable with up-to-date industry reports and trend analyses. For benchmarking, these platforms facilitate quick comparisons with competitors, streamlining the process with automated tools and vast datasets. The platform also has an expert service called ‘FLASH Opinion’ that enables users to submit questions and receive answers from experts within 24 hours. Subsequent interviews with certain experts are also possible. This service allows users to quickly confirm or reject specific business hypotheses and risks with insights from experts across over 200 countries. It eliminates the need to spend days or weeks exploring potentially unsuitable business directions. Integrated data platforms like SPEEDA can accelerate the research process, offering a competitive edge in a crowded market.
Research Pain Points: Inefficiencies from Filtering Hundreds of Leads and Manually Purchasing Company Financials
Prior to the data platform usage, a leading boutique investment bank specialising in M&A advisory in Southeast Asia and Greater China faced several challenges in its due diligence and research processes. The firm required an efficient way to identify potential acquisition targets, accurately evaluate them, and conduct in-depth market research. The traditional methods were time-consuming and often lacked the depth of data needed for informed decision-making.
When the firm is looking for a target company for acquisitions, they filter from hundreds of leads before shortlisting them into about 10 potential targets based on their client's criteria. Without the data platform SPEEDA, they would have to comb through hundreds of firms in addition to incurring costs from purchasing financial and shareholding data of the potential target companies. It is also uncertain whether these data purchases would lead to anything worthwhile. In addition, researching each potential target's respective industry is not efficient, therefore, a data platform allows a quick industry overview and provides potential targets for evaluation and analysis. Most databases also do not focus on the Southeast Asian market. In contrast, SPEEDA provides one of the best Southeast Asian coverages for both private data companies and industries, along with emerging business trends.
Impacts from SPEEDA Usage: By leveraging SPEEDA, the firm managed to solve its pain points. For target screening, the firm could use company screening functions that allow private/public company filtering by different industry standards (by country, by global industry classification or by SPEEDA’s own definitions). Other criteria, such as revenue or operating margin range can also be added to get firms of a certain size. This allows the firm to quickly filter and evaluate the best target companies. SPEEDA also allows users to filter by industry’s growth or profitability, enabling them to quickly see across the region which country and company is the fastest growing or the most profitable.
Company Search Page - SPEEDA
Once we identify our target companies, SPEEDA allows us to see what industry the company is mapped to based on our in-house analyst team and algorithms. SPEEDA also provides over 3,000 industry reports from hundreds of industries such as major sectors namely automobile, renewables, e-commerce to niche industries such as bicycles, biofuels, freight forwarders and more. The industry reports allow us to get a quick overview before going deeper into the due diligence process. The reports are particularly helpful for technical industries where different countries may have different regulations and unique features that are difficult to research quickly without the help of a data platform. SPEEDA also provides M&A deals within a particular industry or region, allowing the firm to see trends, valuations, and exit opportunities for the target companies.
Lastly, SPEEDA has in-house consulting and analyst teams that provide customised research requests to fill research and data gaps that the platform does not provide during the time in a timely manner. With SPEEDA, the firm can now have a balance between data costs and research quality. It also can quickly complete many aspects of the due diligence process, allowing investment deals to be evaluated and completed without losing momentum and returns.
| Pain Point | SPEEDA's Solution |
|---|---|
| Difficulty in identifying viable investment targets | Streamlines deal sourcing with targeted filters for efficient discovery. |
| Challenges in accurately valuing companies | Offers a comprehensive database and M&A deals for valuation and deal analysis. |
| Navigating complex and evolving market landscapes | Provides access to in-depth industry reports and market insights via in-house analyst and consulting teams. |
| Benchmarking against competitors is time-consuming | Facilitates easy peer comparison for effective benchmarking. |
| Conducting thorough due diligence is cumbersome | Simplifies the due diligence process with detailed financial information and stakeholder analysis. |
| Lack of Southeast Asia-specific research and analysis | Southeast-Asia-focused data platform with a local team |
Sign Up for a Free Trial for SPEEDA – your comprehensive solution for enhancing due diligence and research across Southeast Asia. With its robust database tailored for both public and private companies, alongside proprietary reports on industry trends and M&A data, SPEEDA equips PE firms with the tools needed for precise target screening, valuation, and market analysis. Benefit from customised research services, access to an expert network through Flash Opinion, and the latest global news. Sign up for a free trial today, and discuss your pain points with us and how SPEEDA can address them for you.
