How has the pandemic affected due diligence?

The majority of PE investment professionals have moved transactions through the pipeline during the pandemic, research from proSapient show.

The coronavirus pandemic did not greatly impact managers’ abilities to conduct due diligence on target companies last year, a survey of private equity executives has found.

Nearly one quarter of respondents in the industry intelligence firm’s latest survey, conducted exclusively for Private Equity International, said more than 60 percent of their deal pipeline projects progressed to the due diligence stage during March to December last year.

Only 5 percent said that just under one in 10 opportunities they looked at progressed to due diligence.

“The research study shows that at each stage of the investment process there is a slight decline in the amount of activity. But what has surprised us is that the number of due diligences generally has held up,” said proSapient founder Margo Polishchuk.

“What we saw was an initial freeze of deals at the onset of the pandemic, in which GPs were dedicated to their existing portfolio companies, followed by a cautious approach to eyeing opportunities without transacting that much or transacting on smaller opportunities.”

She added that the increase in deals in the fourth quarter should continue in the first quarter of 2021, especially now that it is possible to go after larger opportunities amid a broadening reduction in concerns relating to the covid-19 pandemic.

Compared with the same period in 2019, less than half (46 percent) of respondents said that the proportion of deals that moved from prospecting and initial analysis to diligence has “slightly or significantly decreased”. Thirty-five percent of respondents said that the proportion of deals that made it to due diligence increased, and a further 18 percent said it remained relatively the same.

Of the deals in the due diligence phase during March to December last year, more than half moved to the bidding process, according to 41 percent of respondents.

ProSapient surveyed 100 private equity executives, from analysts to chief executives at general partners across the globe, between November and December to find out how they kept capital flowing through the coronavirus pandemic.

Just under 10 percent of respondents in the survey indicated that DDs were “unsuccessful in execution” due to remote working challenges including travel restrictions, restrictions to in-person meetings, and technological infrastructural support, among other issues.

Choon Hong Tan, managing director at South-East Asia-focused Northstar Group, told PEI in December that portfolio company owners need to have a certain level of comfort with PE firms to facilitate a fully virtual diligence. Tan noted that medium-sized companies with a professional management team and with previous PE ownership are generally more at ease in conducting 100 percent virtual due diligence processes.

Deal activity in Europe bounced back in H2 2020 after a brief and sudden shock in the first half, recording its third-highest annual value in over a decade, according to data from PitchBook. PE firms closed more than 4,179 transactions worth nearly €450 billion in 2020 – a year-on-year decrease of less than 3 percent in terms of both value and volume. In the US, PE deal activity topped 5,000 deals at $678 billion last year, only a 7 percent decrease in deal value from 2019.

Read more about PE firms’ willingness to travel and quarantine to due diligence potential acquisitions here.