In recent years, the private equity industry has been thriving. Strong fundraising and returns have seen global private equity funds rise, meaning the total industry assets were worth over $4.1 trillion at the beginning of 2020. However, the coronavirus pandemic has plunged the global economy into a period of uncertainty. Many markets are seeing revenues plunge due to the sudden drop in consumer demand. Despite this, private equity firms are performing surprisingly well despite the economic uncertainty. The Financial Times recently reported that the top ten ranking private equity groups by deal count have announced deals worth a total of more than $40bn since the beginning of March.
Private equity firms are increasingly relying on digital data to identify new, hopefully fruitful, investment opportunities. In an unstable and changeable market landscape, firms need assurances that their investments are likely to make significant returns. Digital data offers insight into companies and can help investors predict the probability of success.
Why Digital Due Diligence is Important.
To understand the importance of digital due diligence, we need to look back in time. Historically, due diligence involved the investigation of a business’ finances, management and legal compliance to determine the benefits and risks of acquisition. Due diligence now involves much more than the state of a company’s finances and management. The investigation now goes much deeper; questions need to be asked and then investigated.
Is there demand in the market?
How are specific demographics behaving, and is there intent to buy?
What is their sentiment towards the sector?
Is there headroom for company growth?
What web and business strategies should a company adopt?
The list goes on.
You can answer the questions above with digital data. Robust digital data triangulated through multiple sources provides a clear indication of the health and opportunity of any digital business. It can act as a proxy for wide market trends, meaning that investors can have a clear picture of the benefits and risks associated with the purchase as well as the likely trajectory of the business.
Long Term Dynamics in Market Dynamics.
Digital data is used to assess how audience profiles, demography and digital use is changing over time. By looking at cross-sections of online data over time, companies can identify sociodemographic indicators which allow them to rethink target audiences. This then enables companies to devise their specific brand positioning and multi-media conversion strategies. Through detailed analysis of historical search traffic and online commentary, companies can establish intent and behavioural changes in their market. Businesses can also predict market recovery light of notable events such as Brexit and acts of terrorism.
What is the impact?
The impact of assessing the long term changes in audience dynamics is that it validates company hypotheses about market changes. It also confirms that particular stimuli influence customers’ decision making. In the case of certain industries, digital data demonstrates that the news is a key influence in the decision-making process. This is particularly true of the travel industry, as has been demonstrated during the coronavirus pandemic.
Can Digital Data Review Opportunities for Diversification into New Territories?
Digital data can shed light on opportunities for expansion into new markets and territories. Local market demand is determined by search insights and then cut by audience type to reveal distinctions between demographics in a specific territory. Changes in online traffic can be used as a proxy for a company’s market share in the area and can identify shifts in consumer journeys. When assessing whether new opportunities exist, in new territories or otherwise, analysis of the digital customer journey and engagement enables businesses to understand the changing role and sentiment towards their specific industry. The impact of using digital data enables companies to properly judge whether diversification to a new territory is a wise investment.
Digital Data Can Help Companies Evaluate Audience Sentiment.
The correct use of digital data allows companies to evaluate sentiment over certain topics, which enables them to offer products and services that should be well received. To determine sentiment, an individual needs to assess traffic and search activity, as well as mapping the evolution of changes to the data. Within audience analysis, we can look at customer sentiment, as well as stickiness, cohorts, crossover and intent indicators. If these are generally positive, companies can proceed with a new product or service with confidence that it is likely to be well received by target audiences.
Digital data drilldowns into topics such as brand quality and competition time demonstrate how companies performed against industry standards. Are they performing above or below average? What is working well, and what needs changing? By identifying reputational red flags and fixing current or potential problems, businesses are more likely to be successful and long-lived. Not only this, but it can also position companies to enable them to grow above their competitors and take a larger market share.
Digital Data Can Determine Which Areas of a Digital Marketing Strategy Need Reassessment.
Effective digital marketing is essential to all businesses in this day and age. “Digital debt” is a new phenomenon that private equity firms and businesses face. Digital due diligence is essential to determine if a company has a digital debt. This includes the state of their website, the traffic the website receives, social media accounts and social media policies, security and privacy practices, and more. Millions of businesses globally rely on eCommerce to sell their products and services, and online purchasing is only going to grow. By 2040, 95% of all retail purchases will likely be online. To succeed in their endeavours, businesses need effective digital processes and marketing to attract customers and give them a positive user experience.
Diagnose Digital Drop-offs.
For example, suppose a retailer is experiencing high customer drop-offs on their website and wanted to better understand their target audience. In that case, digital data can reveal what they need to change about their digital presence. This would likely involve an assessment of brand awareness and their uplift potential.
Digital data would such as reviews and assessing market share would help the brand understand their customers’ perception of their business as well as their competitors. By analysing year-on-year consumer data and identifying ways to improve brand loyalty. Using digital data to make marketing decisions is vital for success and enables brands to diagnose the causes of drop-offs.
What Digital Data is Available?
There is a wealth of digital data available to help businesses conduct digital due diligence.
An analysis of site traffic enables companies to assess how multiple brands in a specific sector are performing. Not only does it allow potential investors to have an insight into how the company is performing digitally, but it also allows them to assess the digital performance of competitors or the sector in general.
Mapping social conversation allows potential investors to judge general sentiment towards a company or the industry as a whole. Social conversations can identify changing attitudes to products or services that may affect sales performance down the line. Digital data can also identify the devices that consumers are using to visit websites and make purchases. Does a company need a digital overhaul to create a better eCommerce experience? Are people discovering brands through organic searches? If not, does the site need to be optimised for SEO?
Assessing marketing efficiencies is essential for investors to get a full understanding of how the potential acquisition is performing. Is the email marketing strategy successful? Is the company receiving referrals? How are their social media accounts performing, and is the social media content leading to conversions? By assessing the marketing mix using digital data, potential investors can see a clear picture of what marketing strategies are performing well, and which areas may need improvement.
Futures modelling allows investors to see how the company might grow if there is an investment in staff and advertising budgets based on current traffic and conversion rates. We split estimated growth into three different categories: conservative, moderate or high growth. By estimating how much money a company needs to invest in PPC, SEO, ads, and new staff members, potential investors can see a clearer picture of what the future may hold for a company if they decide to invest.
The Possibilities are Endless.
Digital data is a powerful tool that businesses must not overlook in 2020. Private equity firms have a responsibility to assess the viability of a business; this includes its digital presence. 14.1% of all global purchases are bought online; as a result, a below-average digital presence can be the nail in the coffin for businesses. What the coronavirus pandemic has shown is that eCommerce is the future. Those who do not assess the digital viability of potential acquisitions are risking business failure unnecessarily.
To find out more about onefourzero’s Digital Due Diligence services in more detail, click here.