Are we seeing the end of Due Diligence as we know it? |

Admittedly a deliberately inflammatory and rhetorical question, but it underlies a lot of conversations that Freshminds is having with the Strategy Consulting and PE worlds at the moment.

Having spent many years meeting various people from both of these worlds, we can point to a noticeable shift in focus. In the days post the financial crisis, the Due Diligence (DD) and indeed entire deal cycle was carried out with some noticeably different focus points compared to the situation we see today.

How does Due Diligence normally work?

To support an initial positive assessment of a business plan, PE firms need to assess the technical and financial feasibility of a prospective deal in exhaustive detail. External consultants are often used to assess the commercial or market prospects, as well as the technical feasibility of the proposition.

This is unless of course the PE firm has suitably qualified people in-house - which is another separate rising trend that we have witnessed, with an ever increasing amount of ex-strategy consultants within PE.

DD aims to support or contradict the PE firm’s own initial impressions of the business plan and often indicates a very serious intent to buy/sell.

Thus, in essence, the DD process is used to discover any skeletons or fundamental problems that may exist and ideally make the entire investment process easier (and therefore less costly) for all concerned.

So, traditionally there has been a broad focus of DD on this assessment of the commercial viability and the prospects of a given deal and of course broadly speaking, this remains at the core of DD processes.

However, what we have seen of late is a shift in focus onto what could loosely be defined as everything “customer”. Whether it is customer journey, customer strategy or customer acquisition this trend has become more and more prevalent and we are seeing traditional DD processes shift more and more to look at this area.

Where is the shift occurring?

Now, obviously there are some sectors / functionalities that have altered less and still rely on the more traditional focuses around market need vs. supply or operational costs etc. Heavy industry, infrastructure, Oil & Gas etc. given their asset heavy cost base still operate DD processes in much the same way as they have always done.

The real change is seen where an investment thesis is focussed on tech, software and online businesses. The need for customer acquisition and comprehensive manageable customer journeys has spiked massively, not to mention a separate shift around risk and regulation and the Artificial Intelligence market; but maybe they are topics for another day!

As a result of this, we have seen a similar adjacent increase in Product Management and Customer Insight/Innovation positions as a further symptom of the increased attention on these areas.

What this means is essentially that PE firms with a focus on high growth tech businesses are less interested in discovering the minutia of the commercial and market feasibility as they come in at a distinct second place. They are, in fact, irrelevant if they can’t see clear channels and means of pushing their product in front of more and more customers and continuing to increase their digital/online reach.

That is not to say that traditional DD considerations are no longer needed as they are still pivotal in major decision-making processes; it is just that the emphasis is now far more skewed towards customer acquisition.

What does this mean?

As a result of this for the first time ever we are seeing PE firms genuinely considering candidates with no prior PE or even, quite surprisingly, Strategy Consultancy experience. If the candidate can prove their quantitative ability is robust enough to withstand the day-to-day activities, then a high calibre background in digital marketing and the ability to overlay this with strong commercial oversight can be as useful and indeed pivotal for pushing portfolio companies toward bigger and bigger percentage point growth.

In an investment world where the strategic “bolt on” has been king for years this is perhaps a logical progression. Admittedly this sort of candidate does not always sit on the pure play investment team, but with the rise of strategy and functionally focussed teams within mid and low cap PE, we are seeing some really interesting hybrid roles that combine this ability of customer growth via online channels with a more classic strategic consulting / investment background. Candidates that can bring demonstrable experience of both sides of this to the table are as a result in particularly high demand at the moment.

So, is Due Diligence dying out? Well no, it’s not and it is still a vital underpinning of the whole process.
Is it changing and adapting to the market and bringing new focusses to bear? Yes, definitely, and as a result, there is perhaps the beginnings of some quite disruptive and interesting positions appearing within the traditional investment community.