Potentials of digital due diligence

It is indeed the case that private equity funds are still blithely inves­t­ing milli­ons in statio­nary retail concepts that most analysts rightly consider to be unsus­tainable. Espe­ci­ally since these funds cannot ignore the fact that the affec­ted areas of their port­fo­lios are performing rather poorly. Thus, decis­i­ons to retain or even expand such posi­ti­ons are actually only under­stan­da­ble if one assu­mes that the invest­ment mana­gers are pursuing a hard-core opti­miza­tion approach. After all, anyone who belie­ves in a turn­around and a return to real growth at statio­nary depart­ment stores, book­s­tore chains or travel agency opera­tors would simply be misin­for­med. We live in radi­cal times in which estab­lished busi­ness models can go under within a very short time.

In view of the “disrup­tion” pheno­me­non, private equity funds would have to not only add a “digi­tal” compo­nent to their valua­tion patterns, but comple­tely rethink them from the ground up. Now, at the begin­ning of any due dili­gence, there should always be a GAFA analysis.

The first ques­tion on the way to an invest­ment decis­ion should always be, without excep­tion: How does the company posi­tion itself in rela­tion to the Google, Amazon, Face­book and Apple (GAFA for short) plat­forms? This is because they are domi­na­ting more and more parts of the natio­nal economy. Even if no product or service is purcha­sed directly from them (and this is incre­asingly the case), they deter­mine what consu­mers — and incre­asingly profes­sio­nal buyers — see in terms of offers, how they evaluate them, and even what they think is possi­ble. Thus, it must always be exami­ned to what extent the company’s busi­ness model has been atta­cked or is vulnerable to attack by these platforms.

Inves­tors must learn to reco­gnize which manu­fac­tu­r­ers are parti­cu­larly good at deal­ing with new consu­mer habits — and deve­lop the ability to help those left behind.

It is always surpri­sing that private equity firms spend substan­tial money on finan­cial and legal due dili­gence by proven experts, but settle for — frankly spea­king — amateu­rish audits of digi­tal metrics. Truly sound digi­tal due dili­gence by proven experts should be as much a part of the stan­dard program as finan­cial and legal audits have long been. You also have to look “maybe” unicorns in the mouth — and you should alre­ady know the tooth sequence at this point. — The track record for private equity funds that not only respond to digi­tiza­tion, but proac­tively embrace it, is excep­tio­nally good.

You need to under­stand digi­tal busi­ness and its rules in detail to realize the poten­tial there for your invest­ment port­fo­lio. In due dili­gence proces­ses carried out on behalf of private equity funds, it is noti­ceable that exper­tise is lack­ing and thus analy­sis often comple­tely misses the point. For exam­ple, Ernst & Young, KPMG & Co. seriously examine digi­tal busi­ness models for their short- and medium-term profi­ta­bi­lity and prepare pages of expert reports full of KPIs that can actually only be evalua­ted by e‑commerce and online marke­ting experts.

Looking at marke­ting spend in digi­tal, it’s almost inva­ria­bly the case that whoe­ver looks away first loses. — High spen­dings are not only the rule, but often the prere­qui­site to reach the criti­cal size below which it does not work in the long run. Only when the number of repeat buyers increa­ses signi­fi­cantly is an end to the money-burning phase even remo­tely in sight. — Such rela­ti­onships must be unders­tood, other­wise you run the risk of losing a lot of money on such concepts.