Using data to gauge deal value in private equity

Do more from day one

Private equity (PE) firms and pension funds understand the risks of not fully or effectively quantifying the value of a given transaction. If a bid value is too high, they risk overpaying. If a business is undervalued, there’s a risk the organization won’t win the deal. As PE firms learn the revenue and cost drivers of a business, they need to gauge the deal value as accurately and thoroughly as possible.

At the same time, PE firms and pension funds are under pressure to optimize deal valuations. With market valuations remaining high, PE firms need to find ways to realize those valuations past the transaction process and deliver the returns expected in those deals.

While deal value starts with a rigorous financial due diligence process, many leading organizations are looking beyond finance components to get ahead. They’re putting more focus on value creation across their portfolios and looking beyond business-as-usual activities to identify value creation opportunities.

A data-driven jumpstart on value creation

Value creation teams are looking at functional areas that are used to provide evidence for the valuation through a value creation lens. Data from marketing, human resources, procurement, sales and other areas have become analytical building blocks that can help to identify opportunities to improve the business. Data in these areas is pervasive and available at many businesses and having a major impact on the valuation process.

As organizations understand what’s at stake, they’re embarking on value creation earlier and earlier in the deal lifecycle. But it’s not only an early start that matters. Organizations that can harness data effectively with advanced technology can gauge deal value better and faster, and with a sharper eye toward value creation. They’re more likely to find and realize performance improvements that will translate into value long-term.

For instance a PE firm with data analytics baked into the due diligence process from the outset can learn to make a pricing change much sooner to grow revenue. It can understand a business and an industry deeply enough to recognize the need to leverage a new IT system or see an opportunity to improve cross-sell. Analytics results might point toward bundling products more profitably.

To move faster on value creation, many firms are adopting Artificial Intelligence (AI) and Generative AI (GenAI) tools to process and analyze huge volumes of data automatically. A value creation team can leverage AI to analyze contracts during due diligence, then use GenAI to query a contracts database to extract critical data, such as expiry information.AI and GenAI can also be used to provide or execute value creation strategy. An organization might be able to discover cost savings efficiencies in sales and marketing by adapting GenAI to write personalized marketing copy.

Having this data gives PE firms and pension funds that are taking on active management roles the confidence to make decisions. When organizations close deals with these insights in hand, they’re empowered to take action immediately post-deal.

A strategic investment for private equity

While many PE firms see the importance of value creation in the deal lifecycle, many lack the capacity to do it. Some don’t have a value creation strategy in place. Others wait too long to start in on the value creation process. Some firms still rely on outdated methods of driving value. As a result, they aren’t leveraging data or digital transformation in the value creation process.

Smaller PE firms may lack the data analytics expertise to be able to extract these kinds of insights from their systems. In other words, they have the data, but aren’t able to make the connections. They need a tool that can simply and rapidly perform these kinds of analysis and provide these actionable insights.

Organizations need to dovetail their data and analytics goals with their larger deal plans. Improved EBITDA and gross margins tie directly into enterprise value and favorably impact the sale price. To step forward, it’s essential that organizations step back and build toward that all-important future sale.

A solution that drives and accelerates value creation

To navigate and accelerate the value creation process, many organizations are exploring the use of advanced software tools. These tools can strengthen the due diligence process by analyzing data faster and generating insights into value creation and business performance drivers earlier in the deal process.

Leveraging Artificial Intelligence (AI) and Generative AI (GenAI) helps drive further organizational efficiencies in the process. Transaction windows can be tight and specialized technology helps PE firms work more efficiently with short timeframes. KPMG Elevate, for example, helps organizations leverage business data across 300 analytical building blocks. The solution analyzes and compares due diligence data with proprietary benchmark data from comparable deals to generate unique data intelligence and insights. AI is applied in procurement analysis to categorize vendors and helps process expense data faster and generate deeper insights.

Armed with better data and insights at every step of the deal lifecycle, PE organizations strengthen their deal conviction and gain long-term competence in value creation planning and execution.

3 steps to start creating value in private equity transactions

Anyone observing the deal landscape in private equity right now can see that data and analytics are impacting the valuation process. To put data to use past due diligence, PE firms need to get their data organized as a first step. After that, they can shift to quick value creation wins and the establishment of a longer-term plan. The following steps can help ensure that organizations have the insight, the confidence, and a game plan to start realizing value on day one:

1. Conduct a data audit. Find out what data exists and whether it’s clean and comprehensive.
2. Get quick wins by prioritizing a few high-value initiatives. Act on an opportunity to put a price increase into effect, lower procurement spend, or execute a cross-sell opportunity.
   
3. Develop a longer term value creation roadmap. Identify long-term transformation priorities, such as bringing in a new IT system or developing the digital infrastructure needed to scale effectively.