A complete guide on how private equity and venture capital investors can gain the competitive edge with effective due diligence
Here at listAlpha we are privileged to work with some of the best investors worldwide and have collaborated closely with them to develop best practices around origination and due diligence. Below is our top tips list on making the most of the listAlpha platform.
Contents / agenda:
1. Screen companies early in the origination process
Too many deals get sufficiently far in the origination funnel (and incur significant costs) only to be discarded due to a significant red flag finding about the management team or the structure of the company. Is the son of the CEO also the head of sales? Has the company gone through four CFOs in the past three years? These are the kinds of facts every investor needs to know upfront, rather than later in the process when the organization is already "pregnant" with the deal.
listAlpha is designed to conduct quick red-flag reviews of the management team in under a minute. Use it to screen all of the incoming deals at the top of the funnel, even at their first mention with advisers or colleagues. Some of our most advanced PE clients integrate this as a mandatory step in their origination process to make sure all of the potential transactions come pre-filtered for any difficult situations. Key things to focus during your screening:
Are any of the family members involved in the organisation? If this is a founder owned company, is it investable and is the management team professional enough?
Are there any C-Suite gaps that need to be filled or remedied? E.g., is there a missing CTO in a tech-enabled company?
What is the age, tenure and expertise of the key senior leaders? Are they a backable team that you can bring to committee?
What is the geographic distribution of the employees? Particularly, for international companies, is there any reliance on a low-cost jurisdiction (e.g., operations in Mexico or outsourced dev team in India)
2. Understand who the key decision makers are
Don't wait for the IM to come out to see what the management team page looks like. Do the work upfront, which will allow you to ask the pertinent questions earlier on in the process. At a minimum, you should we aware of the entire C-Suite team, respective heads of functional units and the key positions from a board and chairman point of view. Check their backgrounds, understand their professional credentials and have a rough assessment in mind of how this management team benchmarks compared to other deals you have backed. If there are any issues identified - raise them earlier on with the M&A advisers running the deal or with the management team directly.
3. Exhaust the field of relevant advisers and experts
Too many PE funds outsource the CDD process to a combination of consultants, headhunters and expert networks and wait for the findings to come in. Our best clients use listAlpha to map out and proactively reach out to the senior executives adjacent to the company to (a) get proprietary insights on the company and to (b) sign them up exclusively for an advisory role on the deal.
Don't just focus on the ex-CEO of the company. Find the past Chairman, ex-NED or a recently departed CFO of the company and do it months ahead of the process. Build a panel of advisers and senior people with contacts into company and leverage that panel collect information and to perform back channel checks on current management and competitive position.
4. Find introduction angles to the key decision makers
Getting a hold of senior people is not always easy, particularly in niche industries or geographies. LinkedIn has a limited reach and cold emails / messages frequently go unanswered. It is precisely for these reasons that we created the listAlpha Angles functionality that uses programmatic methods to find the best possible introduction angle into a given management team. Use it to ask for a soft intro to the CEO from one of your past colleagues or to just find a common topic of discussion for your cold email.
To lean more about how the listAlpha Angles functionality works - please see our solutions page
5. Kick off expert networks and head hunters early on
Once your team has mapped out the landscape of advisers and reached out to the most valuable people, the rest of the field can be covered through expert networks (e.g., GLG, GuidePoint) and head hunters (Skill Capital, etc.), however don't just take their word for it. Expert networks in particular have an incentive to prioritise large, deep projects and tend to underinvest into more difficult smaller assignment where the volume of calls does not justify the work. Use listAlpha timeline feature to cross check their work and ensure that no senior ex-employee was left uncovered or not contacted. Some of our most proactive clients, take a snapshot of the past c-suite and send it straight to their expert networks to accelerate the discovery work.
6. Benchmark competitors
This stage comes into play once the CDD workstream has already been kicked off and the competitors have been identified. A key commercial question at this stage is how does the company compare to its peers in terms of capabilities? Do they have more sales people? Are they underinvested in the technology team? Do they have higher churn that their peers?
Answer all of the questions by quickly generating the respective org charts of the competitors and understanding the number and the qualification of the senior leaders within each functional department. The answer to these workstream should look something like this:
PE due diligence continues to rapidly evolve as more automation, software and data science techniques filter into the industry. Today's investors must constantly innovate and adopt the latest software to get that critical competitive edge in origination and due diligence. Subscribe to our newsletter to get periodic updates on our research and insights in this area and don't forget to try our platform today.