The market is currently filled with mixed messages, mixed signals and potentially missed opportunities. Successful investors in the Middle East understand the importance of high quality, strategic due diligence as a critical tool to ensure positive outcomes when entering a merger and acquisition (M&A) transaction, as well as the importance of answering the complex questions that lie at the heart of a deal. The Middle East deals market is dominated by sovereign wealth funds (SWFs), either directly or indirectly through their subsidiaries, followed by corporates, private equity, and family offices. Of the $11.2 trillion in assets that SWFs are estimated to manage worldwide, more than a third hails from the Middle East region.
Middle Eastern SWFs are more ready than ever to shine. Of the top ten most active sovereign investors this year thus far, six are from the Middle East and most have participated in mega-deals worth over $1 billion.
While data analytics has always played an important role in buy-side and sell-side decisions, the current environment demands a laser-focused approach to drive value across the deal lifecycle. We expect private equity funds and investment companies will have to cope with this excessive deal flow over the next couple of years, specifically when it comes to value-creation initiatives and managerial efforts by investment professionals. Moreover, a new wave of operational restructuring is likely to emerge in the next few years.
Managing returns against the backdrop of market uncertainty and volatility requires conducting due diligence with the surgical precision that only detailed, real-time data analytics can provide. It’s important to consider the factors amplifying the need for data analytics and how these factors may impact your ability to maximize investment returns.
Three areas come front and center:
1- Buyers are all receiving the same data and timing for due diligence. The ability to deliver more analytics in less time can make or break the sale. Are you properly positioned to meet the growing data demand?
2- Data volume and complexity is growing as due diligence timelines are constricted. Do you have a targeted due diligence playbook to gain a competitive edge?
3- In the current, competitive deal environment investors are looking for the best value plays. Do you know how your portfolio companies stack up and do you have the data to demonstrate it during the sale process?
Read: MENA M&A transactions hit $69.7 bn in 9 months
Valuation disparity
Data is also vital in helping investors quantify ‘risk to valuation’ questions given the broadening gap between sellers’ expected valuations and those of buyers. It’s becoming more commonplace to see M&A transactions canceled mid-process due to mismatched valuations.
Sellers and buyers are performing specific risk-to-valuation analysis that reflects their individual perspectives and concerns. In response to unprecedented inflation, sellers and buyers are performing what-if analyses as part of the due diligence process, which requires in-depth data modeling.
The increased need for risk mitigation demands that due diligence processes involve scenario modeling to assess how rising material costs and corresponding changes in selling price would have changed the margin profile and earnings before interest, taxes, depreciation, and amortization (EBITDA). Due diligence should also include sensitivity analyses to assess how potential changes in market dynamics, supply chain, freight costs, and labor costs would drive sale forecasts and customer purchasing behavior.
Those who don’t take these considerations into account may be left with unrealized gains and margins that don’t reflect price-to-market realities. In specific circumstances, scenario modeling can lead to tens of millions of pro forma EBITDA adjustments, which when considering valuations at multiples of EBITDA can materially change valuations.
Buyers are also scrutinizing “what if” analyses and modeling for all scenarios that could impact their ‘buy’ decisions. These scenarios that range across multiple concerns are generally industry agnostic and can be the catalyst for pulling the trigger or hitting the pause button.
Typical scenarios include, but are not limited to: What’s the impact if the labor market in this sector improves, worsens or remains the same? What’s the impact if commodity, raw materials, shipping, and/or energy costs increase versus decrease? What’s the impact if the supply chain continues to deteriorate or, conversely, if it improves?
Heading for the exits
As per the recent S&P 2022 PE Survey, trade sale is the most preferred exit route by PE investors across the Middle East & North Africa region. Those considering divesting indicated trade sale as the favorite exit method followed by IPO.
Early insights yielded from the data can help optimize exit timing amidst ongoing volatility. However, leveraging the benefits of data requires increased flexibility to ensure timely and targeted responses based on the analytics. Sellers need to gauge whether they believe a market recovery is at hand or if an official recession is just a Fed rate hike away. Sellers need to recognize that valuations can turn on a dime given current conditions.
To better ensure exit readiness, sellers should assess their businesses through the buyer’s lens and with a buyer’s mindset. As more and more deals are put on hold due to performance concerns and/or misaligned preliminary bids, sellers should consider conducting an early assessment of the business and how it is trending. Are there red flags that will stand out to potential buyers?
Sellers should also establish real-time, business due diligence metrics monitoring. Sellers should work to have value propositions ready-to-go so they can quickly launch a sell-side process to align with optimal timing. They should also develop robust marketing materials that accurately and comprehensively tell the company’s growth story and utilize key insights gleaned from the data. As data analytics become more robust over time, the marketing materials should be updated accordingly.
Greater due diligence scrutiny, alongside the mounting need for detailed, real-time data analytics, will continue to shape buy-side and sell-side decisions moving forward. The knowledge derived from laser-focused data is key to unlocking value.
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