I have heard that PE due diligence at a top consulting firm is a good way to exit to PE. Is this true? What does this job involve? Is it literally just due diligence? If so, how would that prepare you for PE...sounds incredibly boring!
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Yes, many people did that. Do financial DD at Big Four Accounting firms or legal DD at law firms for PE clients. Of course, it's better to earn the accounting or legal designations before existing to PE. The downside: it's boring and pay sucks.
I've heard that it is very hard to break in PE after the financial Due diligence experience at Big Four Accounting firm due to the lack of modeling skills. Is that right？Which way is better, consulting to PE or transaction service at Big Four - PE?
I am not an expert of FDD related questions, but for accountants, you have to compete smartly and better get your CPA because most bankers don't have. I've seen PE firms hiring a mix of ex-bankers, acountants, lawyers, industry professionals, and yeah, the VIPs.
By the way, I had a FDD friend who just died from overworking. So depending on which market you are in, you don't necessarily work less than banking.
wtf? you are clearly bothered by the death of your friend to say that as a pass by
Interested as well.
There are many different types of due diligence that is outsourced by PE firms. I'd say that 99% of them outsource legal due diligence and accounting due diligence. This is pretty standard. Many also outsource things such as market studies (to firms such as LEK) where they are essentially trying to understand the industry size/growth, the customers (pain point), the target company's market position, etc.
The type of due diligence you're referencing is a bit different. It is usually done by the very large consulting firms for the large PE firms. I'm only familiar with Bain's offering, I'm not sure who else does it. Rather than explain how it works, here is a link to Bain's PE group, which gives a pretty good overview: http://www.bain.com/consulting-services/private-equity/due-diligence.as…
From my understanding, Bain's PE group places VERY well into Private Equity, because it is essentially developing an investment thesis, analyzing businesses, understanding markets, etc. I wouldn't say the work is particularly boring; it is far more exciting than running the numbers over and over again. In theory you'll get to work on a variety of different projects and be exposed to some very smart people. However, I've heard that Bain's PE group works banking hours (2:00am nights and busy weekends), so expect a similar grind.
If you find due diligence incredibly boring, you should re-think pursuing a career in private equity
Working in a group that provides stategic DDs to sponsors is a fantastic training ground for the buyside. A lot of the strategy houses have dedicated teams, famously Bain's PEG, but most of the other shops have these as well. Basically, in a strategic DD engagement, you spend 3-4 weeks assessing the target's commercial outlook -- i.e., how can you grow (new products, internationalisation, new product features/extensions), what are cost-cutting options, is the firm's positioning viable in the long-term, what would you change going forward and what's the roadmap for this. I think working in such a group is great as you learn to think through the commercial side of transactions, the downside is very long hours (much harder than your already challenging average corporate strategy engagement) as you often have to understand a new industry really quickly and then go through the points I mentioned.
The exit options especially into growth equity places, where it's not all down to financial modelling, are quite good, however I'd like to echo the earlier statement made here that while this is a viable route in, M&A should be more straight-forward for multiple reasons, including (i) a lot of PE executives are former bankers and just naturally prefer "their own" and (ii) there's somewhat of a "generation contract" between MDs and analysts where MDs will help star analysts to move into PE (while partners will try to keep star consultants).
Strategic DD shouldn't be mixed up with all the other DD components like financial and legal DD; those things are done by the accountants and lawyers and tend to be a bit dry, for my taste. I think you need to truly hate business if you call strategic DDs boring.
financial DD is richer than indicated here. People in FDD are mostly CPAs who understand financials inside out. while transfer out is harder into PE, it is certainly doable. The only key experience you will lack is modeling experience.
Can anyone provide a robust list of consulting firms that do PE strategy due diligence work similar to Bain's PEG group? Thanks!
Is there a difference between operational due diligence (ODD) and commercial due diligence (CDD)?
If so, please explain...
Commercial DD focuses on the market (i.e. market size (by segments, products, ...), growth, underlying trends, competitive dynamics, etc., essentially a market study done by the standard strategy consultancies) whereas Operational DD is much more hands-on and focuses on operational improvements, potential cost cutting, restructuring etc (rather done by e.g. Alvarez & Marsal). Based on my experience, every single PE fund does a buyside commercial DD (outsourced to consultants) in addition to the vendor commercial due diligence reports that are usually provided by the sell-side (which is basically the same, just done by another consulting firm - sell-side tends to be overly optimistic, buyside rather conservative). Operational DDs on the other hand are less frequent done, usually not pursued unless it is a key component of the investment thesis / equity story (which it usually is not in a normal mid- large cap LBO fund, rather in distressed ones). Another reason that CDDs are much more commonplace than ODDs is that CDDs can easily be conducted out-side in, i.e. without access to much company data, as it is basically an aggregation of available industry reports combined with extensive expert interviews. ODDs, however, are difficult to conduct outside-in as it is very important to e.g. know the contract structure with customers, suppliers, employees, ... as well as a fine-grained level of understanding regarding the cost structure of the target. Sorry if thats a bit all over the place, currently at work. Hope that helps
Really helpful thanks! So its clear that CDD is a great pre-PE experience but could the same be said for ODD?
Would ODD in conjunction with other experience e.g. turnaround consulting & integration consulting be a good enough experience to have a shot at breaking into PE pre-MBA (especially at a highly operationally focused MM PE shop)?
Obviously with any experience its very difficult to break into PE and many other factors apply but just wondering how ODD experience compares to CDD experience when it comes to PE recruiting.
Thanks!
I'd say ODD ppl are more technical, i.e. you have them to check your supply chain, manufacturing processes, your retail operations etc. in details, hence I'd say it'd be harder to make a switch to PE than being a CDD guy, unless you are targeting a fund with some operational team.
I thought that well said, +1
I understand CDD is stronger experience than ODD regarding PE recruiting. However, does someone with a wide range of consulting experience (e.g. ODD, M&A Integration, Turnaround) have a decent ability that to break into PE?
ASAPP - I think you make a good point regarding the operational team - how would one go about getting exposure to those opportunities assuming headhunters aren't actively recruiting you for them?
If you have a wide range of consulting exprience that could directly contribute to an M&A process imo it gives you a good chance for PE, however that is not necessarily a safe route to PE switch. PE firm may simply prefer a guy with previous experience at a bad performing / closed PE shop over you simply cuz that guy has deal & exit experience, that is what I see from the market I am in (quite a small PE community here). p.s. I do not work for a PE fund but I did some M&A advisory to mid-market funds and I also know a bunch of ppl who did a switch from IB related roles.
Wrt your 2nd question, no idea how those firms recruit, maybe try to get in touch with junior level guys via linkedin etc. and ask them about the firm/work in general whether they recruit etc. Hard start but worth a try.
Can you guys list some middle market CDD firms that do it well? Lower or Upper MM would be interesting but feel free to drop some smaller or larger names as well.
Due Diligence in PE (Originally Posted: 12/23/2011)
What do people usually mean by the due diligence process in private equity? What would a typical analyst/associate be required to do during the process?
Probably would have to do their due diligence ?
read the freakin FAQs - post by Compbanker goes into details on that.
//www.wallstreetoasis.com/blog/breaking-into-private-equity-from-banking
Interviewing execs, digging up dirt, looking at their risk management policies, looking into their employment procedures, etc. Basically all the work that a regular PE analyst wouldn't do.
basically looking for any red flags / potential liabilities you want to identify before acquisition. this means looking through historical financial statements, contracts the company has entered into with customers and vendors, insurance policies, employee contracts, management forecasts, working capital age...the list goes on.
Due diligence typically means investigating the books of companies to identify value drivers for the deal, identify overstatements in assets, understatements in liabilities , detoriorations in historical margins, assessing market competition and positioning, highlighting red flags ( increasing provisions for uncollected balances, increasing employees costs, contingent liabilities and lawsuits raised against/by the company), reviewing the history of the company and assessing the competencies of key management ( i.e senior management turnover, history, ability to meet budgets).
Due diligence in PE fundraising for fund employees (Originally Posted: 09/10/2013)
Has anyone ever gone through the fundraising process as an employee of a fund? What type of diligence do they do on individual employees? Track record? Background check? Reference check?
Also, who conducts the DD process on behalf on LPs?
I worked at a placement agent briefly. It seems that they do due diligence primarily on the founders/fund managers and run reference checks. So they'll call references directly. Track record is pretty important. Even if it's a first-time fund they'll look at track records of the managers at their old firms and try to put together some sort of cumulative IRR.
I'm pretty sure a lot of LPs just do the due diligence themselves, or if they're really small they'll outsource to investment consultants like Towers Watson, Cambridge Associates, Capital Dynamics, etc. I know my school's endowment used to outsource everything but recently started to do things in-house and started an analyst program rotating through PE, HF, etc.
I only worked at the placement agent for a summer but these are my two cents. I was also in Asia.
Generally if you are below the VP level (really below the MD level for most LPs/secondaries), the maximum level of work that will be done on you will be a linkedin/resume check.
It is usually outsourced and they do a criminal background on all employees as well as prior litigation. Some will go as far as doing a credit check on employees. Each LP is in charge of doing their own DD.
Anyone at a fund go through the process?
Yes, twice. What is said above is correct. Pretty much any member of the GP is eligible to be fully background checked by the LP. It is not uncommon for an LP to outsource the due diligence to a third party. The diligence requests range from very basic to incredibly incredibly annoying (two "incrediblys" is not a typo...).
Thanks CompBanker this is great feedback. If anyone else has first hand experience I would really appreciate a PM or a post.
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