Enhancing PE deal revenue with data rooms

Erik Mills

#Data Room News Update: Mar 16, 2023

Intro

Companies that want to grow are interested in different developmental plans. They could employ more people, or increase the number of services they render, but one of the most straightforward ways is to find someone who will invest in the company. This sort of investment is called private equity. 

As with any deal, appropriate documentation is very important. It helps with providing transparency to the potential investor and simplifies the actions both sides need to undertake. This is where data rooms can prove useful. 

Due to worldwide circumstances, many of those physical data rooms were transformed into virtual data rooms. There are a couple of benefits that make this shift a positive event. 

But before we start defining those benefits, we need to understand what private equity deals are, and how those data rooms tie into those transactions.

What are private equity deals?

Private equity is the process of investing in an organization that is not listed on the stock exchange. 

Generally, private equity refers to acquiring businesses, which later evolve into limited partnerships. At the same time, the private equity meaning refers to an umbrella term for leveraged buyouts, venture capital and distressed debt investing.

In essence, private equity investing aims to extract value from the target organization.

The initial assessment of investment opportunities, which consists of identifying goals and risk tolerance, may seem like a fast-paced procedure. But on the other hand, the conclusion of these transactions can take up to a year.

What is a private equity deal in terms of objectives?

In a nutshell, the private equity deal’s primary objective is to generate a higher rate of return by gaining full or partial control over a company.

Institutional and retail investors, who typically undertake private equity and funding initiatives, may have different interests and goals. That’s because institutional investors invest funds of others on their behalf, while retail investors are actually investing for themselves, often in retirement or brokerage accounts.

The ultimate goals of private equity companies may be related to such accomplishments as strengthening the balance sheet, discovering modern technologies, expanding a business network through acquisitions, or increasing the business’s working capital.

What is private equity: 2023 deal drivers

According to Manoj Mahenthiran, a PE leader at PwC US, the business is now in a period of significant change for private equity due to the challenging economic climate around the world.

Thus, the primary drivers leading the deal are as follows.

Capital discipline

Public organizations are identifying opportunities for divestment, investment, or closure. So, they need to maximize strategic alignment, stop underperforming businesses and, in some instances, attract investment. This trend is rekindling interest in private equity, in particular, because the valuations of private entities are consistently high.

Navigating the deep uncertainty

Our era’s political and economic upheavals highlight two crucial things for private equity First, the transaction strategies’ flexibility will increase in importance, so investors will need managers who can generate profits regardless of the political and economic conditions. Second, investing in enterprises with solid management and sustainable supply will become dominant.

Unlocking value

Over the past decade, the answer to the question “what is private equity and how does it work” has changed. Specifically, there has been a rapid expansion of the sector, and the scheme of cost reduction and growth through acquisitions has become insufficient. As a result, private equity now needs to put in more effort to create value.

What is a private equity investor?

A private equity investor is an investor who makes direct investments in an established non-public organization.

Generally, they don’t invest in startups like business angels and venture capitalists.

A private equity investor can also flip a business, that is, acquire an organization, improve operations, and then exit the organization through a sale to make a profit.

As a rule, investors demand a controlling stake, which gives them a significant say in crucial decision-making. Moreover, they can overhaul management and business operations and sometimes even sell the organization.

Why is private equity important?

Effectively managing private equity is vital for the economy, helping small businesses grow and develop, and investors, in turn, make a profit.

Furthermore, the importance of private equity firms becomes even more significant in economic and political instability or pandemics. In particular, private equity firms provide organizations with the capital and expertise, which is crucial for surviving the crisis with less loss.

How private equity deals work

Now you can investigate the private equity deal stages to understand how private equity works:

1. Deal sourcing

Deal sourcing is the search by investors for investment opportunities in the market. The process’s primary purpose is to ensure a sufficient volume of deals for a certain period to keep a viable flow of transactions.

2. Due diligence

The due diligence procedure lies in a careful study of the documents related to the company. As a rule, consultants and auditors carry out financial, legal, tax, and technical due diligence. Then, by studying and analyzing the collected data, investors get an answer to critical questions and make investment decisions accordingly.

3. Deal negotiation

At this stage, parties establish the transaction terms, including representations, warranties, and covenants. An investment agreement, a management agreement, a consulting agreement, and a share purchase agreement are drafted in such a way as to include all the elements that make up the transaction.

4. Deal closing

Closing a deal is the easiest step and typically involves signing agreements, transferring funds from the buyer to the seller, and performing other administrative functions such as updating company charters.

5. Post acquisition monitoring

Post-acquisition monitoring involves financial and operational company monitoring against a previously established budget and expansion plan.

6. Exit

After three years, on average, the organization matures and is ready for a trade sale or IPO. Investors, in turn, receive their money back with a profit.

What do private equity firms do?

Private equity firms are not passive investors. They can buy a majority stake or 100% of a target company to improve performance, streamline operations, or reduce costs.

In fact, there can be many reasons for buying shares. For example, target companies may need financial support to develop products or technology. In other cases, an established company may have a lot of assets but many problems as well. To solve them, a private equity firm increases the target’s productivity, therefore boosting the value of this organization.

How do private equity firms make money?

Private equity firms buy organizations and overhaul them to get a profit when the business goes on sale again. 

As for the capital for acquisitions, it is different for institutional and retail investors. For institutional investors, the capital comes from outside funds managed by firms, while retail investors use their own capital.

What is a private equity data room?

Like in each important business transaction, the world of private equity deals is full of paperwork. Statements about the cash flow of the company, the list of employees, and current patents are all documents that are incredibly important for the operational capacities of the company in the deal. 

A private equity data room, a feature-rich secure cloud solution, makes the deal transparent, working with documents secure, and multiple-party cooperation seamless. A data room private equity use case implies the following:

• Portfolio company filings and reporting. Thanks to an investor data room, private equity deals go smoother with simplified data storage, secure access to the documents based on customizable user access rights, and activity tracking.

• Buy-side due diligence. When reviewing documents, PE or venture capital firms may assign certain data to specific auditors and advisors for study and analysis, which organizes and simplifies the due diligence process for all parties involved.
• Sell-side due diligence. Using ready-made due diligence checklists, target companies can avoid the risk of presenting irrelevant documents to private equity firms.  Additionally, they can conduct the diligence process with multiple potential buyers at a time. The target company can share separate data room access for each potential investor, tracking their activities, identifying the highest-priority buyers, and detecting or removing any bottlenecks.
• Fundraising. Structuring and sharing sensitive documents with investors, auditors, and limited partners is a breeze with VDR private equity. In this way, companies can monitor interactions with data to identify parties willing to invest and streamline the fundraising process.

Why do people need data rooms for private equity?

The value of virtual data rooms for private equity lies in the following benefits.

Enhanced data safety for easy yet secure access

If someone is interested in investing in the company, safe access to data from anywhere in the world is a huge benefit. This is what virtual data rooms provide through the following solutions:

• Granular user permissions for controlled interactions with certain documents
• Two-factor verification allowing access for authorized users only
• Time and IP-address restrictions for secure data room access
• Single sign-in for the convenience of logging in
• Remote shred for limiting access to confidential information

Seamless data organization for simplified user experience

A virtual data room automatically organizes files and folders in document trees, speeds up data uploads, and makes searching easier. The features for this are as follows:

• Drag and drop upload for ease of adding to documents to the investor data room
• Bulk upload for fast documents uploading process
• Automatic index numbering for convenient data organization in folder structure
• Full-text search for ease of finding any necessary information
• Support of most document formats for convenient sharing of data in the deal process

Secure collaboration space for accelerated deal flow

Investors, target company leaders, auditors, consultants, and lawyers can work seamlessly in a single secure environment and communicate in real time. Here are some features that investor data rooms offer:

• Private and group chats for information exchange
• Activity notifications for full control of data room interactions
• Q&A module for assigning experts and getting the necessary answers
• Audio and video conferencing tools for secure, centralized communications
• Task assignment for the diligence process tracking

In most cases, thanks to the benefits of virtual data room use, deals are concluded with a net profit for both sides.

How data rooms can increase revenue during private equity deals?

There are a couple of ways a private equity data room can increase revenue apart from the many other benefits such a software solution entails.

Deal sourcing

Combining all of the intelligence found on the internet about a company, or companies worth working with is crucial to the later development of private equity based on deal sourcing private equity that might be interested in combined growth. A data room private equity used for research should return its value in the future of the company. 

Here are the deal-sourcing tasks that data rooms optimize:

• Overview of investment opportunities. The investment management team collects and analyzes market positions, conducts a competitive analysis, finds growth opportunities, and analyzes track records of potential organizations. Thanks to the software’s data organization tools, the initial due diligence steps are greatly accelerated.
  
• Deal attribution analysis. A seamless environment for document approval, investor reporting, and financial reporting allows funds to evaluate the profitability of transactions and assess the distribution of investments, which maximizes profit.
  
• Portfolio construction. The data rooms platform allows a company to approve lucrative deals from a bird’s eye view of its portfolio with ample opportunity to identify more potential investment sectors and regions.

Overseeing and providing transparency

Through the use of a virtual data room, the private equity company can update the investors with real-time data about their operations, and how the money is used, including private equity platforms.

For this, a virtual data room offers the following industry-leading analytical solutions:

• AI-powered data analysis. Artificial intelligence tools significantly speed up getting insights on private equity deal progress. So, users can pull data about logins, invitations, uploaded files, and more.
  
• Reporting tools. The data room records activity on the platform in real time, providing admins with extensive color-coded reports on the most frequently viewed files, Q&A interactions, downloaded or printed documents, etc. This is how investors can specify points of struggle moving toward closing the deal.

Deal control

If there are deals to be made with a private equity company, or the private equity company wants to make deals of their own, there is great control in using a tool like virtual data room private equity utilizes. You can control all the moving pieces all from inside of this software solution.

Here is what target companies and investors get for monitoring and closing private equity deals:

• Accelerated onboarding. Sophisticated VDR mechanisms for secure data access and use allow you to engage partners without risks. In addition, the intuitive interface provides users with a comfortable experience regardless of their IT skills.
  
• Streamlined collaboration. The data room is a secure location for exchanging sensitive information and updating everyone concerned on the agenda. Also, investors can send due diligence questionnaires to reduce the duration of the investigation.
  
• Improved portfolio company support. With the help of Q&A workflows, investment companies can establish trust relationships with portfolio organizations, consulting them on the deal specifics.

What to include in a private equity virtual data room?

A virtual data room should be well-structured and answer all investor questions, for which you should include all the relevant documents. The list of these documents may vary, but we suggest you look at the most frequently requested ones. Such information is of most interest to investors, as it can provide a compelling picture of a business, its financial performance, organizational success, etc:

• Pitch deck
• Financial statements
• Investors’ rights agreement
• Stock purchase agreement
• Articles of incorporation
• Past investor updates
• Audits, tax returns, financial assessments
• Company financials
• Business plans and product information
• Voting agreements
• Market research
• Capitalization tables
• Pro forma statements
• Profit and loss statements
• Board members meeting minutes
• Intellectual property
• Sales strategy and pipeline
• Marketing plans
• Technology investments
• Human resources information
• Patents, trademarks
• Intern contracts, and more

Some investors may need more documents for data-driven decision-making, which is why it is necessary to agree on the list of company documents before private equity due diligence.

Conclusion

Virtual data rooms are tailored for private equity transactions so investors and target companies can benefit from the security, transparency, and smooth deal flow.

Most importantly, the solution’s full potential is available on one platform, so the parties never need third-party applications.

All in all, the data room is one of the most efficient solutions for seamless multi-deal management, risk elimination, and increasing investment returns.