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Realizing the value of private equity investments

The key is integrated operational due diligence

Author: Doug McDonald

Deloitte Corporate Finance Inc.

Not all private equity investments are equal — nor are their returns. Deloitte surveyed over 500 global investors from virtually every industry with an active M&A market on the longer-term success of investments made when merger and acquisitions peaked in the late 1990s.

Those surveyed deemed less than a third of all acquisitions a success — in other words, they had not achieved their stated objectives within the planned timeframe.

Today, private equity investors aim to obtain rates of return of between 20% and 30% within four to six years. Such above-average returns reflect a higher investment risk, and emphasize the importance of an integrated financial and operational due diligence process in realizing value.

All investors surveyed by Deloitte had undertaken due diligence exercises with virtually identical areas of focus. However, there was strong correlation between the success of a deal and the way in which due diligence was linked to other phases of the investment process.

Due diligence should be fully integrated in investment process
Traditionally, financial due diligence was just one step in the process — primarily a number crunching exercise focused on finding potential deal breakers and providing comfort on risks. Today, the objective is increasingly to provide investors with greater assurance they will realize the value of their investments. As a result, due diligence is no longer an isolated step. It is now integrated throughout the process.

What do financial and operational due diligence advisors do?
An integrated approach requires investigation by a multidisciplinary team, typically industry experts, tax specialists, environmental and market analysts, actuaries, employee benefit consultants, business intelligence specialists and technology experts.

  • Help buyers identify opportunities
  • Zero in on the underlying profitability
  • Uncover previously undetected angles for achieving value

What creates investment value?
While the specific value generators may be unique to each investment,  Canadian venture capitalists surveyed each quarter by Deloitte cite the most important factors affecting investment decisions as:

  • Management expertise
  • Technical and product leadership
  • Positive cash flow
  • Market dominance
  • Customer base

Once value generators are identified, the due diligence team advises throughout the transaction on the best structures for deals, negotiates strategies, positions, and potential synergies, and determines the valuation and bid to better ensure the value of the investment is ultimately realized.

Tips to achieving above-average rates of return

  • Understand the investment’s value generators
  • Identify risk areas and their potential impact on the realization of value
  • Integrate financial and operational due diligence throughout investment process

Learn more about how our  Corporate Finance  professionals can help you realize the value of private equity investments.