Over the past year, we’ve noticed a dramatic shift with our private equity clients—one that stands out in nearly 30 years of helping firms drive successful transactions. Deals are hitting roadblocks, negotiations are dragging, and the process is moving at a snail’s pace. In an industry built on speed and decisiveness, this slowdown is more than frustrating; it’s a potential threat to achieving returns in an increasingly competitive market.
Private equity has always been about seizing opportunities quickly, but lately, it feels like the brakes are on. Transactions that once wrapped up in a matter of months are now taking far longer, often stretching into uncharted territory. Why is this happening? Is it the market, the process, or something else entirely?
More importantly, how can firms overcome these bottlenecks and regain momentum? In this article, we’ll break down the key factors causing delays, explore the evolving role of due diligence, and share actionable strategies for navigating this challenging environment.
A Perfect Storm of Challenges
The delays can’t be attributed to just one factor. Instead, a combination of interconnected challenges has created a “perfect storm” in private equity transactions: increased scrutiny during due diligence, competitive bidding processes, regulatory changes, and more. However, three key challenges really stand out:
1. Market Volatility and Economic Uncertainty
Fluctuating market conditions and unpredictable economic trends have made it harder for private equity firms to evaluate opportunities confidently. This uncertainty can create a ripple effect, with firms spending more time analyzing risks, adjusting valuations, and ensuring they aren’t overcommitting in an unstable environment. The need to act cautiously has slowed deal timelines considerably, as pauses are happening at each stage of diligence.
2. Higher Interest Rates
Rising interest rates have made capital more expensive, creating additional pressure for private equity firms. While competitive bidding and seller demand often set high prices, the increased cost of financing means firms must be more deliberate and certain before committing to a deal. This heightened sensitivity adds time to the decision-making process and requires even greater diligence.
3. Underperformance of Post-Pandemic Investments
Many private equity firms are grappling with disappointing returns on investments made during and after the pandemic. Government stimulus programs boosted consumer and business spending, creating a temporary surge in demand. This “pseudo-demand” misled investors into overvaluing opportunities. Now, as that demand has slowed, portfolio companies are underperforming, and PE firms face mounting pressure from investors to sell and distribute funds, further complicating their strategies.
4. Valuation Discrepancies
Buyers and sellers often find themselves at odds over deal valuations, especially in today’s environment of heightened scrutiny. Sellers may anchor their expectations in past market highs or see opportunities to push for higher valuations in competitive bidding scenarios. When multiple firms are competing for the same target, sellers can feel emboldened to hold out for the best possible price, creating significant friction. This disconnect can lead to prolonged negotiations as both sides work to align on a fair and realistic valuation.
5. Integration Concerns
As private equity firms increasingly focus on long-term value creation, they’re scrutinizing post-acquisition plans more thoroughly than ever before. This shift means firms are considering not just the immediate returns but also how smoothly the acquired company can be integrated into existing operations. Planning for integration ahead of time can be complex, requiring detailed assessments of cultural, operational, and customer-facing elements.
How Customer Diligence Can Help Navigate the Delays
Amid these challenges, customer diligence has emerged as a powerful tool for private equity firms. Unlike traditional due diligence, which primarily focuses on financials and operations, customer diligence provides deep insights into the market and customer base of the target company. It answers critical questions like:
- Does the company truly have a strong market fit?
- Are customers likely to remain loyal post-transaction?
- How can the company drive long-term growth with its current customer base?
By incorporating customer diligence earlier in the process, firms can mitigate risks, resolve valuation discrepancies, and streamline decision-making—ultimately saving valuable time.
Proactive Steps to Overcome the Bottleneck
While the challenges slowing down private equity deals are complex, they are not insurmountable. Firms that adapt their approaches and rethink traditional processes can regain momentum and stay ahead in the market. Here are three impactful strategies to overcome bottlenecks and accelerate deal timelines:
1. Start Diligence Before the LOI
Waiting until a Letter of Intent is signed to begin diligence often leaves firms scrambling to uncover critical insights under tight timelines. Instead, start the diligence process earlier by conducting quick market assessments or engaging with prospects who align with the target’s customer profile.
Why it works: Early diligence identifies red flags and validates market opportunities before significant resources are committed. This approach ensures that your firm is pursuing deals with a higher likelihood of success, saving time and avoiding wasted effort on nonviable targets.
Example: A quick market scan might reveal that that the Total Addressable Market (TAM) is smaller than described in valuation materials, a critical insight that could prompt renegotiation or a pivot in strategy.
2. Leverage Predictive Modeling for Smarter Decisions
Predictive modeling leverages data analytics to uncover patterns and forecast market trends, offering private equity firms a powerful tool for evaluating customer loyalty, market demand, and revenue growth scenarios. When timelines are tight, predictive modeling enables firms to extrapolate insights from a small set of customer diligence participants, projecting findings onto the broader population with confidence. This approach not only accelerates decision-making but also uncovers opportunities for value creation that extend far beyond the initial transaction.
Why it works: Predictive modeling reduces guesswork, providing firms with the data they need to make informed decisions faster. This means fewer delays due to back-and-forth discussions or second-guessing the numbers.
Example: A private equity firm used predictive modeling to assess a target’s regional customer base, revealing hidden growth potential in underserved markets. This insight not only accelerated deal approval but also influenced post-deal strategies.
3. Prioritize Customer Diligence to Build Confidence
Traditional due diligence often focuses on operational and financial metrics but overlooks the customer perspective. Incorporating Voice of the Customer (VoC) research into the process provides a clearer picture of market fit, customer loyalty, any risks – whether environmental or internal, and growth opportunities.
Why it works: By understanding what drives customer loyalty and how the target performs against competitors, firms can move forward with greater confidence. This clarity reduces last-minute questions that slow deals and lays a foundation for post-transaction success.
Example: Customer diligence uncovered that a target company’s top customers were planning to increase spending over the next three fiscal years, turning a slow-moving deal into a high-priority acquisition.
Closing Thoughts
The key to navigating today’s private equity challenges is to stay proactive and embrace tools and strategies that provide clarity earlier in the process. By starting diligence pre-LOI, leveraging predictive analytics, and integrating customer diligence, firms can cut through delays, make smarter decisions, and close deals with confidence.
While delays in private equity deals are a frustrating reality, they also present an opportunity for firms to reevaluate and refine their approaches. By investing in more robust diligence processes, including customer diligence, private equity firms can navigate uncertainty and come out ahead.
If your firm is ready to streamline your transactions and maximize the value of your deals, we’d love to help. Schedule a meeting with Loyalty Research today to learn how customer diligence can be your edge in today’s challenging market.
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