In The M&A Lifecycle - Kaiser Associates
The ChangingRole of Techin theM&ALifecyclePUBLISHEDMAY 2020
IntroductionFrom a macro perspective, Private Equity is prospering —illustrated by record fundraising numbers, high valuations andstrong deal activity. Even the adverse impacts of the COVID 19crisis are expected to be temporary. However, when we peel thecurtain back to examine the diligence process, it becomes evidentthat PE firms are behind the curve when it comes to:1Evaluating the risk and upside potential of tech in ourinvestment targets2 Our own use of tech enabled services to automate and enhancethe effectiveness of diligence and our ability to successfullyexecute, measure, and track value creation strategiesKaiser’s recently concluded market study engaged a mix of senior PEinvestment professionals on the evolving role of tech enabled toolsduring diligence and the impact of tech on value creation. Throughconversations with industry leaders and investors, we gained richinsight into the current state of workflows and internal processes atPE firms from pre-diligence to exit. We invite you to dive into Kaiser’s2020 study “The Changing Role of Tech in the M&A Lifecycle” – as aninsider, you are likely to nod your head and share similar sentimentsto those interviewed. Most importantly, we hope you come awaywith a few takeaways to act on at your firm.Kevin SlaydenSENIOR PARTNER,PRIVATE EQUITY1 2020 KAISER ASSOCIATES, INC. / OFFICES: LONDON / SÃO PAULO / HONG KONG / WASHINGTON, D.C.KAISERASSOCIATES.COM
Current State of the MarketThe investment process for PE firms, from pre-diligence to exit, istypically well defined but includes many unmet needs and pain pointsTHE STATUS QUO IS MANUAL & SUBJECTIVEA snapshot of the Private Equity investment processreveals that while most PE firms have some version ofstructured processes for diligence, there is still substantial room for automation and increased sophistication.Many firms continue to rely on outdated trackingmethods (read: Excel) to document diligence checklists and findings. Information streams are funneledfrom a variety of investment professionals workingon any given deal, and synthesis is impeded and complicated by resulting individualized and subjectivedata tracking.As a result, diligence analysis and decisions rely onsiloed data and insights. While the process of manuallycapturing data has historically been successful ininforming valuation, downside risk, growth accelerations, etc. – it is becoming more and more evident thatthese methods are not enough to stay competitive.In part, a manual process has stayed in favor for solong due to lingering hesitation that broadly applying astandardized playbook will fail to meet the bespokeneeds of different types of companies. For the collective industry to break away from ingrained manual processes, new tech-oriented diligence vendors will needto address these concerns head on. Further, it’s criticalthat training and education take place between PEfirms and digital strategy experts to identify and closethe gap on which value creation levers to pull.3 out of 4 PE firms reported that they use manual trackingmethods and 0 companies reported using a highlysophisticated approach (e.g. automation) to value creation executionWhich statement most accurately describes how your firm manages, measures, and tracks value creation initiatives?Rely on the Management team and receivegeneral updates at Board meetings31.8%Define KPI's for value creation initiativesand informally track using manual tools (e.g., spreadsheets)45.5%Define KPI's for value creation initiatives, track rigorously with a softwaretool, and firm staff intimately involved in applying expertise22.7%Highly sophisticated approach to value creation execution includingKPI setting/tracking, automated and frequent tracking, and ableto estimate ROI for each initiative and demonstrate value created.0.0%“ There is no objectivity to the process —even when you do the work, you don’tnecessarily believe the outcome ”— PARTNER, UPPER MIDDLE-MARKET FIRM2 2020 KAISER ASSOCIATES, INC. / OFFICES: LONDON / HONG KONG / SÃO PAULO / WASHINGTON, D.C.KAISERASSOCIATES.COM
Current Stateof the MarketValue Creation FunnelThe survey revealed a range of unaddressed pain points in the value creation funnelwith highly inefficient translation of value creation ideas to successful execution.UNTAPPED VALUE CREATIONValue Creation ideasidentified in DiligenceWhen we dig deeper to understand the breakdown in processes and why the industry hasbeen slow to digitally advance diligence toolsand processes, we observed 3 primary challenges commonly identified by PE firms.1 Measurement of ROI/Financial Impact46% selected for implementation2 Sourcing Vendors3 Standardization 5 out of 10The standard ROI tracking approach relies onreceiving specific initiative updates from management teams at quarterly Board Meetings,however these reporting methods often don’texplicitly link to value creation achieved. Whilethere has been some success in the applyingvalue creation approaches across the portfolio,specifically digital marketing and integratedCRMs, opportunity remains to substantially scalethose efforts.Strikingly, more than half (54%) of valuecreation ideas developed during diligence arenot acted on and often lost. Out of the ideasselected for implementation, only 48% areexecuted, and less than half of those (47%)are successful.PE firms self-report that less than 1 out 4 ideasthey select for implementation are viewed assuccessful executions.48% of opportunities selectedfor implementation are actually executedSlightly more than2 out of 1047% of executed opportunitiesmet or exceed planned outcomes 1 out of 10Only 1 out of every 10value creation ideaactually ends up as asuccessful execution“ There is a huge gap in the industry forbuilding a value creation plan that goespast the typical 100-day plan to ensureall initiatives and objectives are followed.”— PRACTICE LEAD, UPPER MIDDLE-MARKET FIRM3 2020 KAISER ASSOCIATES, INC. / OFFICES: LONDON / HONG KONG / SÃO PAULO / WASHINGTON, D.C.KAISERASSOCIATES.COM
The Rising DemandThe demand for diligence products and services to assess technicalrisk is rapidly rising and starting to cover a broader scopeACCELERATING THE DILIGENCE PROCESSIt’s clear there’s a need to improve the diligence process. Fortunately, there is overwhelming demand andmotivation for change. This is a top of mind issue forfirms facing pressure to stay ahead, identify newopportunities and deliver positive returns.Across the industry, firms are willing to integratebetter, tech-oriented tools in their diligenceprocesses and value creation activities. But, towhat extent? What categories are prime forsubstantial adoption? And what are the foreseeable roadblocks?DILIGENCEACTIVITYOther Non-Tech Diligence(Legal, Insurance, Tax, Compliance, QofE)Market / Commercial DiligenceTechnology Operations(IT Organization, Biz. Continuity)Security Systems(Cyber, Privacy, System Audit)IT Back-Office(CRM, ERP, Accounting, Licenses)Software Product AssessmentDigital Marketing Capability(SEO, Lead Gen)4The most commonly conducted tech-related diligence category is technology operations (e.g. ITorganization, business continuity), which is currently being carried out 60% of the time, with anexpected 25% growth over the next 5 years.Overall, the tech-oriented diligence performedtoday still tends to focus heavily on assessing downside risk and exposure. However, the market ismoving quickly, and as more companies beginto implement these solutions, focus will also beginto shift towards growth and upside potentialassessments.FREQUENCY OFCONDUCTING DILIGENCEEXPECTEDGROWTH93%78%60%48%45%43%42% 2020 KAISER ASSOCIATES, INC. / OFFICES: LONDON / HONG KONG / SÃO PAULO / WASHINGTON, D.C.KAISERASSOCIATES.COM
Future OutlookA handful of innovative firms are leading the way and paving aroadmap for the collective industry to adopt tech-oriented toolsduring diligence and value creationFIRST-MOVERSA small number of leading firms have advantageouslyprioritized the integration of new digital tools andprocesses during the diligence process. These firmshave invested in building out their digital capabilitiesand talent to set up dedicated, in-house teams.San Diego-based Ensunet has been a world-classprovider of IT enterprise architecture solutions since2008 The firm’s team of solutions architects and engineers specialize in executing for their client’s uniqueneeds in the lightning-paced, no-margin-for-errorworld of M&A. Their suite of services covers thefollowing areas:lPost-merger integrationlEnterprise er due diligenceData center relocations, design,and operations supportl lOutcome-based IT planning and consultingEnsunet’s IT diligence methodology allows rapididentification of weaknesses and opportunities thata buyers’ team would identify during due diligence.Another firm deploying innovative solutions and ITtools that create value in diligence is TritonPartners. Triton is currently invested in 41 companiesin Europe, with combined sales of around 16.5bnand around 80,000 employees. The firm providesconsultation to companies on the best digitalimprovements, and potential growth areas based onindustry and company capabilities. They are alsoactively pursuing value cre-ation opportunitiesthrough their Digitalization Group. The DigitizationGroup facilitates ‘digital journeys’, includingimprovements to internal systems, staff augmentation, tool upgrades, and workshops/trainings.Additionally, new approaches and tools are alsoemerging to help PE firms manage the internal diligenceprocess. DiliVer, an M&A software company,specializes in due diligence solutions that helpyield better combined entity outcomes based onadvanced analytics for enterprise performance todate and growth potential in the future.DiliVer's MASTTM (M&A Software Tools) SaaSapplications offer the FinTech M&A market's onlypackaged enterprise-wide, metrics-based duediligence scorecard tools that allow executives andinvestors to make data analytics-drivendealdecisionstoimprove the quality and reducethe risk of M&A transactions from both the buy sideand the sell side.“ IT and Tech used to be something that wasjust not looked at in diligence. Now, it is anever-increasing component of what we do ”— DIRECTOR, LOWER MIDDLE-MARKET FIRM5 2020 KAISER ASSOCIATES, INC. / OFFICES: LONDON / HONG KONG / SÃO PAULO / WASHINGTON, D.C.KAISERASSOCIATES.COM
FutureOutlookTAKEAWAYSMoving forward, every PE investor’s toolkit should include 1) assessingthe risk and upside potential of tech in all deal types/sizes and 2) usingtech-enabled diligence tools to close the gap between translating valuecreation ideas at close to successful execution. Here are our top 3 tips tohelp PEs prepare and stay competitive:Invest more in understanding and capturingthe upside potential of tech, rather than focusingon downside risk tilize diligence findings in more direct and thoughtUful ways to inform value creation and invest in toolsthat ensure better translation of the value creationplan to action for the portfolio companiesBuild and strengthen relationships with emergingdiligence vendors (commercial, IT and digitalmarketing) that are outside traditional providers(Q of E, insurance, legal)6 2020 KAISER ASSOCIATES, INC. / OFFICES: LONDON / HONG KONG / SÃO PAULO / WASHINGTON, D.C.KAISERASSOCIATES.COM
MethodologyKaiser’s “The Changing Role of Tech in the M&A Lifecycle” studyexplored the evolving role of tech-oriented tools during diligenceand value creation through in-depth conversations with seniorleadership at private equity firms across the US ranging fromlower to upper middle market. From January to March 2020, KaiserAssociates conducted primary interviews and online surveys with 40 private equity firms in addition to a handful of service providersthat have current market offerings in the space.QUESTION 1: WHAT IS YOUR CURRENT ROLE?Director / VPPrincipal25%50%17%8%PartnerOtherQUESTION 2: WOULD YOU PROVIDE SOME DETAILSON THE TYPICAL SIZE OF COMPAINES YOU INVEST IN? 1-10MEBITDA 10-25MEBITDA39%3% 25-50MEBITDA 50-100MEBITDA739%6%14% 100 MEBITDA 2020 KAISER ASSOCIATES, INC. / OFFICES: LONDON / HONG KONG / SÃO PAULO / WASHINGTON, D.C.KAISERASSOCIATES.COM
The ChangingRole of Tech inthe M&A lifecycleAbout KaiserKaiser Associates is a global strategy consulting firm that set the standard for “fact-based”strategy and implementation. Since founding in 1981, Kaiser has deployed unmatched360⁰ research capability and rigorous analytics to generate original, granular insights thathelp our clients turn their most difficult challenges into game-changing growth andproductivity opportunities.Today, Kaiser continues to approach every engagement with an entrepreneurial spirit,often operating like a start-up to remain nimble and agile with a bias towards action. Weare privileged to be a preferred thought partner to some of the world’s most admiredcompanies, currently working with 8 of 2020 Fortune’s Global 50 most admired. Kaisersupports global clients from our headquarters in Washington, DC and offices in London,Hong Kong and Sao Paolo.KAISER’S PRIVATE EQUITY BUSINESSKaiser’s Private Equity and M&A Practice partners with active acquirers ranging frommiddle market, large cap firms, to active Corporate Development teams. We supportclients across the entire M&A lifecycle including deal generation, threshold questiontesting, market sizing, commercial due diligence, portfolio operations and exit.Our approach combines rigorous qualitative and quantitative analysis, original primaryresearch, and industry expertise in 5 core sectors: Consumer & Retail, Financial Services &Payments, Healthcare, Industrials and TMT.Our services are particularly effective in niche and fast changing sectors, or in situationswhere the investment thesis is based on a particular angle that is not sufficiently covered inthe public domain due to our unique ability to create a totally “new-to-the-world” andaccurate fact base.GET IN TOUCH WITH USKevin SlaydenSENIOR PARTNER, PRIVATE EQUITYkslayden@kaiserassociates.com703-623-94838 2020 KAISER ASSOCIATES, INC. / OFFICES: LONDON / HONG KONG / SÃO PAULO / WASHINGTON, D.C.KAISERASSOCIATES.COM
Associates conducted primary interviews and online surveys with 40 private equity firms in addition to a handful of service providers that have current market offerings in the space. QUESTION 1 : WHAT IS YOUR CURRENT ROLE? Principal 1-10M EBITDA 10-25M EBITDA 100 M 50-100M EBITDA EBITDA 25-50M EBITDA Partner QUESTION 2: WOULD YOU PROVIDE .
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