Do You Need an Expert for Your Due Diligence?
Read Time: 4 Minutes
This article originally appeared in Pitchbook’s PE Middle Market Report
A successful middle market deal no longer depends solely on the size of your checkbook. When private equity was a nascent industry, company founders looking for a full or partial exit had limited options for financial sponsors to back their next phase of growth, particularly if public markets were not an option. Today, competition is fierce, and management teams can afford to be pickier than their predecessors.
What matters most? It varies, but management teams now see industry expertise as critical to the continued growth and strength of their business. Is the financial sponsor willing to invest in new products, services, or markets? Do they have a track record of scaling businesses in similar industries? Is their vision for the future in line? What unique access can the PE sponsor provide to target customers, potential M&A opportunities, or other valuable connections in the industry?
While PE firms can try to front-run or altogether avoid a competitive process, most deals today come to market via a banker-led auction and 20-30+ sponsors receive teasers. Although this narrows to a handful of interested parties as diligence progresses, standing out from the crowd is critical.
An Expert on the Right Side of the Table
Many middle market companies play in niche segments and receive less attention from prominent analysts. These companies require richer analysis and deeper insights to develop a strong understanding of the opportunity and value. This often means adding a seasoned industry professional who has “been there, done that” to the team. An expert strengthens the diligence process—helping to more quickly cement the conviction that the opportunity is an attractive one. Also, the firm that does this positions itself as a preferred partner to the management team because it understands their business needs and industry dynamics upfront.
Differentiating During Due Diligence
An expert who knows the space can easily identify where the proverbial skeletons are buried and where to dig. These professionals also offer connections in the space who can help paint an unbiased view of the strengths and weaknesses of the target relative to its competition.
Positioning as a Preferred Partner
PE sponsors can cast themselves in a more favorable light in a variety of ways:
- Demonstrating robust operating experience in a similar/parallel company viewed as highly strategic or impactful
- Evidencing connections to untapped or in-pipeline potential new customers
- Showcasing a strong network among other companies in the space who may serve as attractive M&A targets
- Flexing a robust rolodex that can support the team’s ability to engage/hire the best talent.
The gold standard is someone with all of the above, who is viewed as a “legend” in the space for the impact they’ve had on the industry.
Finding the Right Expert
About five years ago, GLG launched a suite of solutions geared towards giving sponsors the edge they need to build conviction quickly and differentiate themselves in auction processes. Our focus is on building flexible, agile solutions that support key phases of the diligence process through value creation within portfolio companies.
We now regularly identify and secure elite professionals to work on an extended basis alongside deal teams as they review targets, meet with management teams, and analyze data. Such specialists can serve as invaluable resources who support every phase of diligence to ensure that ultimately a sponsor bids a reasonable, appropriate price for the business.
Many GLG clients have walked away from deals because the target company’s management team was telling a great story, but our specialists helped uncover significant concerns with their technology, the strength of their customer base, or the industry at large that ultimately tainted the deal. Of course, we have also seen firms working with GLG develop strong conviction around a winning bid as a result of more nuanced synergies and opportunities that their deal specialist helped uncover.
If the sponsor secures the deal, we often see the same deal specialist stay on to serve in operating or independent board roles post-close, where they go on to help the portfolio company generate significant value via key customer introductions, strategic M&A,
leadership team coaching, new market entry, new product launches, prioritizing growth initiatives, or cost reduction strategies. Such support can often make the difference between a good deal and a great deal.
Finding the type of expertise I’ve described isn’t easy, and getting the right fit for the sponsor as well as the target is critical. GLG maintains relationships with more than 43,000 recent C-Level executives able to serve in these types of roles, which means we have the resources to find the right fit for any firm.
Finding the Perfect Match
Today’s competitive deal environment creates opportunities for sponsors to differentiate themselves on many more elements than just the size of their bid. Targets seek partners who will provide the resources and expertise needed to support their growth—and it’s critical for these sponsors in turn to develop a deep, robust understanding of these niche businesses and
their associated risks and opportunities. These are really two sides of the same coin that—in the end—reflect the earnest intent to create significant value for all parties in an investment by finding that perfect match.
About Darin Clemente
Darin is the Head of Private Equity in the Americas at GLG. Prior to assuming his current role in 2019, he served as Managing Director, Head of Regional Business Development & Private Equity / Venture Capital (PE/VC) Practice. Before joining GLG in 2011, Darin held leadership roles at iPipeline, InfoNgen, Pyxis Mobile, and Thomson Financial. Darin holds a BA from Boston College.
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