Management Due Diligence for Private Equity

Effective management due diligence (MDD) can give private equity investors the much needed edge in winning a must have asset

Diligencing the senior leadership team is an often-overlooked component of the private equity DD process. This area is particularly key for late-stage VC, growth equity and mid-market PE investments, where the quality and the strength of the senior leadership team is a key facet of the investment theses. This lies in contrast to early-stage VC deals (which are typically based around the founder/founders) or large cap PE (where the management team is more interchangeable). However, despite this fact most mid market PE diligence efforts are focused on financial and commercial topics, with management DD being an afterthought that is assessed qualitatively through personal interactions rather than an explicit desktop exercise.

 

What is Management Due Diligence (MDD) and how can an investor perform this with listAlpha?


1) Understand who the key decision makers are


Although one might jump to concluding that the senior C-Suite members are the key decision makers, that is not always the case. Ex-founders, past non-executive directors or even senior advisers to the company, may have significant influence over the company and can be critical allies in winning over the deal. To investigate this, use the listAlpha "Timeline" feature to understand how many cumulative tenure of a given individual and their likely standing in the organization.


In the below example, the senior adviser is likely to exert significantly more influence in the company rather than the recently joined CEO or CFO:


 

2) Find patterns in their Senior Management Team's backgrounds


A common job experience is the most frequent meeting point for founders and for management teams broadly. A CEO that has previously spent 5 years working together with the Head of Sales and the CFO can signal a strong and a well-oiled team. However this can also imply potential aversion to replacing the CFO (in case of underperformance) or upgrading the management team as the company scales internationally.


The pattern shown above is quite common in start-ups where the core of the team was actually formed 3-4 years prior to founding of the company. To uncover this dynamic, we have created the "Frequency" tab that runs a pivot table on all of the previous experience of the management team, as presented above.


 

3) Find recent leavers and assess churn


Senior leadership departures can serve as a red flag and need to be investigated thoroughly to understand the culture and dynamics of any company. A large number of leavers in a given function (e.g., Sales) can also signal broader issues, such as lack of direction, change of strategy or weakness in the underlying product or service proposition of the company. Use the listAlpha "Joiners and Leavers" tab to understand the most recent departures by each function.

Another key indicator for churn is the ratio of past to current employees. This is a helpful KPI for benchmarking companies in the same sector. A ratio of 1x-2x is reasonable for a tech start-up in the 5-10 year age range (since founding), however figures above 3x usually signal a churn problem or past layoff events.

 

Conclusion


Investigating the senior management dynamics is a key, however frequently overlooked aspect of private company due diligence. Investors that understand this and incorporate these methods into their daily DD process are likely to get the much needed edge in today's competitive markets. Start your management due diligence efforts today, with listAlpha's people intelligence platform.



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