PE Firms and Deal Due Diligence - Part of the Secret Sauce to Run Circles Around Banks

Private Equity (PE) firms run circles around banks when it comes to deal due diligence (DD). Why is that and why is it important?

PE firms manage deals with small teams - typically two or three professionals. This structure is superior to banks large team approach. The core PE team then brings in a wide range of experts to perform specific pieces of due diligence. These experts include lawyers, technologists, industry strategy experts, regulatory specialists, and accountants. The mix of experts required on any given deal varies, so PE firms maintain a wide network of experts they keep on "speed dial". When a PE firm calls, the network of DD specialists respond immediately. Their DD work is completed within extremely tight deadlines.

The DD folks are paid extremely well and the expectation is they move fast. I remember once talking to a doctor buddy I referred to a PE firm as a domain expert within the medical industry. My friend did his DD report in about a week and told me, "That was the easiest $20 grand I ever made."

In a deal I was once involved in the junior member of the PE team managed the data room like an air traffic controller. The two senior partners weren't even there. Our lawyer, who was with me in the room, said, "I've never seen anything like this." It was a sort of blitzkrieg approach. While it was fast it was also thorough - which is critically important.

Banks, when acting as "Strategic Buyers", have to build consensus on a potential deal and this involves dozens of people across multiple functions within the bank. That process is inherently slow in terms of both deciding to buy a company and then performing the actual due diligence.

In the deal I reference I was struck by the difference of three PE guys running our deal vs. literally a team of about 20 non-decision making bankers showing up, all in dark blue suits, listening attentively and some asking generic questions specific to their functional areas. The PE team grasped the big picture while the bankers were stuck in their silos. By the time the bank came to any sort of decision (bank decision-making hierarchy is slow by design) the PE firm had already finished buying our company!

So speed of DD matters, it gets deals done faster and enables PE buyers to beat banks out on good deals. Banks tend to think if you move fast you'll make a bad decision. PE firms' fast DD proves otherwise. You can be FAST and THOROUGH.