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.