Why the Traditional Private Equity Deal Process Falls Short and What To Do About It
In today’s crowded private equity landscape, investment firms are finding it increasingly difficult to gain the competitive insights needed to make sound investment decisions. With a predicted increase in total AUM in the private equity space, as well as an increasing stockpile of dry powder intensifying competition between firms for deal closures, there is more pressure than ever to identify the right deals at the right time with the right strategy.
Investment professionals need a complete understanding of the market to make informed decisions. However, with constraints in the current deal process it’s becoming increasingly challenging to access real-time insights. These are required in a world where the volume, velocity, and variability of knowledge has dramatically transformed.
This blog explores the current challenges private equity firms face during increasingly competitive deal processes and how to successfully navigate them.
The traditional deal process
Private equity firms face a balancing act when pursuing the appropriate size and number of investments. To keep their deal flow viable, firms need to scope a large number of potential deals, when in reality, only a few will come to fruition. Investment professionals have to, therefore, retain and utilise an increasingly wide range of industry knowledge.
The traditional deal process involves a number of sequential steps that eventually lead to an investment bid and, if successful, a closed deal. These stages include deal sourcing, multiple rounds of due diligence, and the creation of investment proposals. Depending on the competitive insights gathered, these investment proposals can be reviewed and tweaked.
To successfully win a deal, private equity firms need to fully understand the dynamics of the target company and its industry. Furthermore, they need a strategy that will present the best possible return for their stakeholders and investment target. To achieve that goal, funds need to overcome challenges such as competition for deals, identifying the right opportunities, and collecting the insights needed to make a sound investment bid.
Deal velocity & intensified competition
The private equity industry has become increasingly saturated, with investment firms looking to acquire companies as quickly as possible. Due to disruptions caused by COVID-19, there has been a notable acceleration in both deal volume and speed. Deloitte predicts total assets under management (AUM) to reach $5.8 trillion in 2025, up from $4.5 trillion in 2019. The question is how can private equity firms successfully compete in these market conditions without cutting corners?
Identifying the right opportunities
Intense competition requires private equity firms to move at speed on potential investment opportunities. This also means accessing relevant and representative information has never been more critical to maximize successful transactions.
Teams are finding it increasingly difficult to sift through insights that can potentially act as bidding process differentiators. Many investment professionals have a general understanding of where to look but they lack the capacity to fully uncover those competitive insights. These shortfalls are impacting the quality of research gathered for diligence efforts and can potentially lead to erroneous investments.
Lack of capacity has presented an ongoing challenge for private equity firms. The amount of potential deals available and competitiveness to present the winning bid continues to put strain on deal teams. These teams lack the time needed to complete full research scopes across numerous competing projects. This results in investment professionals often compressing a large volume of research or deprioritizing and potentially turning down investment opportunities.
How top-tier consultants can help
To identify and leverage unique knowledge at every stage of the deal process, firms are now turning to top-tier external consultants to expertly run interviews and support part of or the full deal cycle.
While it isn’t new to leverage consultancies to run a higher-level diligence process, many professionals are discovering they can utilize independent professionals trained at the world’s top management consulting firms to provide hyper-focused, individualized reports as well.
The advantage of partnering with an external consultant is that they are experts in ramping up quickly on new projects. Further, they can extract quality insights out of experts during calls, and synthesize the findings ahead of client deadlines. With a congested bidding process, speed is paramount in deal success. Utilizing this strategy can uncover the competitive insights needed in a much shorter time frame than traditional research efforts.
By leveraging consultant support in conducting and synthesizing the findings from expert interviews, investors can identify potential investment targets early on in the diligence phase. A consultant takes an unbiased interviewing approach and gets the true pulse for the market. This offers insight into what competitors have previously done, and where customers view their products & services compared to others.
At AlphaSights, the majority of consultants are highly experienced formers from the top three global consulting firms. They have expertise in conducting diligence work and other research at various stages of the PE deal cycle. As highly skilled interviewers, they are efficient at extracting competitive insights from experts and condensing this knowledge into digestible formats. As a result, investment teams are able to synthesize relevant conclusions without sacrificing quality.
Our Consultant-led Calls are covered under stringent confidentiality protection, with each consultant agreeing to a virtual NDA for every engagement.
Consultant calls autonomously manage the interview process, freeing up teams to execute on deal-focused activities or source additional investment opportunities.
Having a consultant run project interviews drastically expands the number of interviews that can be conducted on a project. Although increasing the number of insights, the quality of these insights is not sacrificed. This support means more perspectives, more knowledge, and ultimately better clarity into an investment. In a world where access to competitive insights can make or break a deal, minute details make all the difference.
Our team at AlphaSights is able to staff consultants that provide the key to moving the needle on research. We have helped deal teams unlock spare time for other important research avenues while simultaneously allowing teams to go further on deals.