Virtual Due Diligence: Best Practices Emerge
Investors are growing accustomed to remote due diligence amid the pandemic; Zac Williams of Monument Group outlines some simple guidelines to help GPs differentiate themselves
It has been one year since private equity firms and the rest of the global economy were forced to abruptly adopt remote-work continuity plans. While many investors initially put new commitments on hold and some GPs postponed fundraising efforts in the immediate aftermath, the surge of private capital fundraising activity in the fourth quarter should make it quite clear that both fund managers and investors have since adapted. While the vaccines certainly provide some hope to GPs that they might resume something approaching more traditional fundraising processes as the year unfolds, the reality is that 2021 will still be marked by travel and meeting restrictions and unexpected lockdowns. As such, GPs should continue to hone their virtual due diligence strategies.
According to Preqin, the fourth quarter saw private capital investors raise $298 billion globally, a 66% improvement over the third quarter fundraising totals and approximately 25% over the second quarter. Anecdotally, while much of the fundraising in the second and third quarters was confined to established managers seeking re-ups from existing investors, the last three months of the year saw institutional investors widen their scope to selectively start new relationships. While there was still a bias for longer-tenured GPs, it is expected that the scope will continue to expand.
Based on private equity deal activity, it is clear the industry is adapting to necessary changes in this regard. Somewhat ironically, the amount of travel that is normally customary to deal sourcing has made the transition to a more static remote-working environment somewhat seamless. Traditionally, being on the road for deal sourcing or fundraising has equipped private equity teams to handle essential portfolio and operational work away from the office.
As it relates to fundraising, online content has also long enabled desktop due diligence, but now that investors are becoming more comfortable with virtual meetings and are in the process of broadening their alternatives universe, some have become more agreeable to “virtual-first” commitments. However, many investors are still working out how to invest with teams where they have not yet had an in-person meeting. In these cases, investors may delay commitments to new managers until later in 2021 when they can both underwrite virtually but ultimately check the box on having met the manager.
At Monument Group, we were as busy as ever last year, securing 13 fund closings on behalf of clients who collectively raised over $13bn. As such, we were able to gain key learnings as to what worked and what did not work with virtual meetings, due diligence and data rooms. To help share those insights, we have compiled some suggestions that should be valuable guidance for all of these formats as firms re-enter a new and different fundraising environment than what they may recall prior to COVID.
● A little effort goes a long way. Take time to consider your virtual communications infrastructure. Ensure high-speed connectivity, clear audio and a well-lit space. Become adept at sharing content on the screen easily and without disruption. Use the mute button when not speaking to ensure that the sound is delivered optimally and stay focused and interested on video-conference meetings.
● Practice as a team. It is important to consider how presenters can share their insights and responses seamlessly when meeting as a group, without interrupting each other and developing the “field sense” to move the discussion along naturally. Many GPs have incorporated the practice of utilising the “next slide please” call-and-response cadence similar to a press conference.
● A window into your culture. Absent customary office visits, GPs should be creative in a virtual setting to showcase their broader team and to keep it light to make the audience feel comfortable. Moreover, remember that investors are inundated with content, so it is important to make the documents that are being shared really count with the highest quality content that is easily digestible on-screen.
● Leverage screen sharing. Investors want behind-scenes-access. An expansive bank of collateral analyses and internal tools, providing details around deal pipelines, extended operator networks, or recruiting initiatives, can help foster that impression.
● Showcase your team. Remember, your team members are exceptionally capable, and investors are keen to know the depth of talent across any fund manager they aim to back. For deeper diligence sessions, members of the team can cycle on and off to make the process efficient and ensure the on-screen participants have an active role at any given time. Introduce younger staff to discuss deals they are working on and carefully curated case studies that allow individuals to highlight their (and the firm’s) contributions. Lastly, be willing to schedule additional sessions that might be typical in a more traditional in-person fundraising environment.
● Be user friendly. Transparency within data rooms is appreciated but digestible summaries of information can help investors navigate and prioritize the analysis that is most important to their decision-making process. Along these same lines, to make their lives as easy as possible; think about how investors might be composing their own reports, while maintaining control of the message and how information is presented.
● Provide engaging content. Consider brief video clips highlighting current portfolio companies or case studies around exits to bring them to life. Brief interviews on key topics can also be effective and can be shared among the investor’s larger teams following the call.
● Make key documents accessible. Presenters should make all materials accessible to prospective investors, via a secure site, in advance of the due diligence session.
● Know your value proposition. Think carefully about your differentiation and be sure to bring this to the fore. If it is hidden within the due diligence questionnaires or buried in excel or word files, it may not be accessible or top of mind to the decision makers who ultimately greenlight a commitment.
● Expand your references. In a virtual world, certain due diligence considerations remain even more important. Where investors have less of a history with a firm, references are critical. As such, GPs need to identify existing investors who can speak confidently about their culture, operations and ethics to fill the intangible gaps that are more pronounced on a remote-fundraising landscape.
Along these same lines, communication also takes on heightened importance, but should be more frequent to reinforce investor relationships mid-fundraising. Virtual AGMs, for instance, are less effective than in-person AGMs to engender relationships on an individual basis. Consider how your outreach program can more effectively recreate the dinners and drinks that typically follow an AGM. These efforts under normal circumstances will pay dividends, but in a virtual world are fast becoming table stakes to secure re-ups.
To a certain degree, investors have also discovered silver linings in the move to virtual due diligence. Some have even noted an appreciation for the more quantitative approach forced by virtual processes, with less scope for charisma, personal biases and connections to influence outcomes. Best practices in virtual engagement can assist processes even when travel is unrestricted and will likely persist even if the world returns “back to normal,” so be prepared to embrace and adapt rather than tolerate and minimize.
From investors’ perspectives, the upheaval of COVID has also provided a window into how well GPs can adapt. So to the extent firms in the market can nail their virtual due diligence presentations and engagement with investors in this new format, this new normal – temporary or not – provides an opportunity for GPs to shine and differentiate themselves from peers who merely see it as a distraction.
This article was originally published on The Drawdown linked here.
