At IGS, we are often are asked to comment on common mistakes private equity clients make during the market diligence process. The top mistakes we see, and do our best to avoid, include:
- Misjudging demand – Is the company itself growing or is the market booming? Is this a fad or a long-term trend? These are questions to ask prior to engaging in a deal. Getting the answers may require talking directly with market participants.
- Over-relying on an industry consultant or operating partner knowledge as the basis for diligence –Industry insiders can sometimes be too close to the subject matter to retain full objectivity and also don’t always know what they don’t know.
- Sacrificing comprehensiveness for cost or timing –Deals can happen quickly, but one should never compromise the quality of due diligence for speed.
- Overestimating own teams’ capabilities –Many deals can be managed in-house but it’s important to be self-aware and realize where your team may have gaps in expertise and/or skills.
- Steering diligence providers toward answer desired –Third-party diligence providers are positioned to take an unbiased, critical look at an investment opportunity so give them the leeway to be truly objective in their assessment.
- Oversensitivity to relationships with brokers or other influencers –At the end of the day, your firm is the one laying down the cash for a deal and so the deal has to work for you. Don’t be afraid to walk away.
- Over relying on co-investor or lead investors’ diligence efforts if deemed insufficient –Communicate closely with co-investors in club deals to make sure you are not duplicating efforts and that you are comfortable with their approach to diligence.