The evolution 
of due diligence

Matt Wells

As Russell mentioned, Matt Wells, I lead our product marketing and strategy team, former banker and got to Intralinks by selling a company that I had started to Intralinks and focused on the M&A space. I'm really excited to have this great panel that we assembled tonight to have a discussion around a study that we just wrapped up that actually was split into four reports that really focused on what happens inside of a virtual data room in this term from starting the data room to announcement.

So that whole pre-announcement period and it's actually a follow up on a study that we did a decade ago, which was the first of its kind that looked at all of that data and for the first time ever, kind of released some information about how long these diligence periods are, how many users are in the data room. And we sought to look at how that has changed and evolved over the last decade since we did that study.

Obviously, we had a pandemic, a big trend toward digitization and really had some what I think are interesting and unique findings. So before we get into that, I think it'd be great if we could just go down the line with the panel and do some introductions and then we'll get into the conversation. We'll start with Val.

Valeriya Vitkova

Yeah, so it's been really great in terms of working with Intralinks, we've been collaborating for more than a decade in terms of research projects. We've been looking at various research questions to investigate. I'm a senior lecturer in corporate finance. I'm also the course director of the accounting and Finance degree at Bayes Business School, and I've been working with Intralinks for more than ten years in terms of research projects and looking at various questions.

And it's it's been really enlightening in terms of the results and the findings that we have. 

Dulce Mendonça

Thank you. Good evening, everyone. It's a pleasure to be here and thank you for the great first of all the invitation and great to be here talking about due diligence. And as I was walking from the office here, I was reflecting That has been actually 20 years since I worked for the first time on a virtual data room.

I was a bit taken by that reflection, but I think it is very encouraging. And it is great that you guys have the benefit of one; real data. Second long time series. And thirdly, that we are here reflecting on how that data can help act on the decision-making process. What can we, if we're looking at the facts, that the data and the research and how we can take better decisions, because at the end of the day, that's what we want to do.

So I've been working, you know, as I said, for more than 20 years in investment. I started off after graduating in investment banking in Portugal and quickly realizing that I wanted to specialize in infrastructure. So I moved to the principle side, and that's what I've been working for over 20 years out of London. But really, I think I’ve been very privileged working across a number of regions.

So I've done deals in most of European countries, really a global career, European countries, North America, some parts of Latin America as well. My current role, I am a partner at infrared Capital Partners. We are a mid-market player in infrastructure. We manage about 13 billion of equity and our history goes back 25 years and across a number of sectors.

So we manage institutional capital, pension funds, insurance companies and a strong focus on renewables or energy, as well as digital infrastructure and some other sectors like transport and social. So great to be here. Thank you. Thanks for inviting us. 

Niall Keppie 

Thanks. Great to be here. My name is Niall Keppie. I'm part of the M&A team at Shell.

So we are trying to address the challenge through M&A. In our case, of how do we provide more energy, cleaner energy to the world. We know it's needed. We find that's not easy. And so part of M&A, we are doing a lot of acquisitions and divestments, too, to support that. I've also been in M&A long enough to remember physical data rooms when they existed, and I’ve been involved in M&A activities across oil, gas, chemicals, retail and increasingly renewables over the last five years, which was really new for us as well.

So that's me. Thanks for having me.

Matthew Bowen

I’m Matthew Bowen, counsel in the Global Corporate Group at Reed Smith. Also delighted to be here, of course, as well. my background. I've been a practicing corporate lawyer for over ten years now and with a principal focus on private M&A activity across a wide range of sectors.

Reed Smith has a number of sort of strong industry focuses, such as energy, natural resources, transportation and media. So naturally my practice area now does envelop those quite a lot, albeit, I do have a lot of experience in doing M&A in other sectors as well. A little bit about Reed Smith. We're an international law firm and originally headquartered in the U.S. and Pittsburgh being our founding office but we've now grown to have over 27 offices worldwide throughout the U.S. naturally, and then Europe, Middle East and Asia.

Matt Wells

Thank you. Also, a great, great name, Matthew. Val, maybe you could start us off just giving a foundation of the methodology behind the study, what we did and kind of the approach. 

Valeriya Vitkova

So, what we did ten years ago is we looked at how can we quantify the due diligence process? And the number of metrics that we looked at is the length of due diligence. So how long is the pre-announcement due diligence process? The other aspect was the size of information. So how many files are shared between the different players and then the size of the file. So we would look at the number of files and the size of the files, the length of due diligence, and that would help us to then identify why, how does that link to outcomes when it comes to, for example, likelihood of deal succession.

So how does that all link to the probability that the deal will complete? How does that link to the likelihood that we generate higher value for shareholders?

And this is the unique data set that we've been able to acquire with this collaboration with the Intralinks in terms of about 600 transactions, and then based on the more recent evidence, about 900 transactions. And so we've been able to look at the data set, with a higher number of observations and more reliable outcomes to determine the answer.

And so that has been one of the key contributions. And then more so in terms of that is a meta data set. So we haven't looked at any confidential data, but it's more like average and long term general outcomes in terms of what are the implications that can help us to make better decisions. 

Matt Wells

That's right. And I think one of the things that you mentioned that we looked at ten years ago and and looked at again, you know, in this most recent study was the average length of due diligence in that pre-announced period from the time a data room opens to the time a deal was announced. And ten years ago, that length of time was 124 days.

And in this most recent study, the average length of time in that pre-announcement period has expanded pretty considerably to 203 days. Dulce, I'm curious, with your experience in many due diligence processes across your careers, if you look at those two numbers from those two studies, does that does that make sense to you based on how the world has evolved and how diligence has evolved?

And, you know, what do you what do you think has caused most of that expansion? 

Dulce Mendonça

In my view, I think recently the due diligence time frames have expanded. Indeed, I think the more than six months is it's probably twice as much as a deal should be in terms of due diligence, time frame to be to have confidence that it will happen, it will close.

So I think ideally you want to you want to keep the the key ingredients for success on an M&A deal. One is keeping the competitive tension. So you need to have quite under control the time frame for the diligence and and stick to it, But one observation I would make as well is that in the current environment, with the recent interest rates going up in terms of fund raising, I think the pace has also slowed.

So if you combine these aspects, there has been some disruption in terms of buyer expectations and seller expectations. So therefore, if they're not netting it’s likely that the transaction at the time the initial timetable is is more I you know is likely that will slip. So, I would add another aspect that perhaps ten years ago we wouldn't have is that there are additional aspects of due diligence like impact of climate change, for example.

That's something that we would not be spending as much time as we are now if we look back even perhaps five or six years ago. So that's another area of due diligence. And ESG focus, for example, is relatively new as well. So there are indeed certain aspects of additional due diligence work, but in my opinion, I don't think that's what is driving the longer period, I think it’s more a function of this disruption and in the interest rate cost of that going up, cost of equity should go up as well.

Sellers are not adjusting their expectations. Therefore, there are more transactions that come to, you know, a bit of a hold point and then they need to rebalance. I would just add another point that I think in terms of markets, I've seen the U.S. adjusting quicker than Europe. I don't know if you have breakdowns of how that compares, but at least my observation has also been that different markets are just at different paces.

Matt Wells

Interesting point. We did, one of the things that was interesting about this most recent study is that we did isolate the, you know, let's call it the COVID period. Everything changed in daily life. Everything changed in M&A, too. And and what we found was that prior to 2020, deals were taking on average 189 days before announcement in that pre-announcement period.

And then from 2020 to 2022, that number shot up to 247. So obviously something happened there. Niall, I'm curious, you know, in what ways did doing M&A change for you during that period and maybe what habits that have led to that increase in time, maybe stuck with you since then? 

Niall Keppie

Yeah, I think we had some I mean, even before due diligence, there were some immediate changes we found in terms of M&A. And the first one was with counterparties we were interacting. We were used to in the old days, you'd get together in a room and would build trust by having lunch or going for dinner, and that just went, impossible. I think, at the beginning, and we weren't used to using video right at the beginning and we were all on Amazon trying to get webcams right, and they weren't available.

And we found that it was quite tough to build trust with people virtually who we hadn't met if it was just an audio call. So, we had a real dip and I think that extended time, I guess in diligence, but just extended time in the process to do that. We then found there was a change once everyone got webcams and that worked and we had some weird things we felt contributed to more trust with people we hadn't met, because it was suddenly this view like we all had of your seeing into people's, I'm going to say, personal spaces more so it wasn't someone sitting in a dark suit in an office, but their t shirts and their kids and their pets going across the table. And that that kind of helped to kind of humanize the things a bit more. And we found that was that was pretty helpful. And one on that as well as we found doing deals around the world, there were countries where prior to the pandemic, it was just the norm that if you wanted to go work, that you had to travel there because there was no trust on phones. The audio quality was poor, and that really changed incredibly quickly. So that that sped up some of the things that we were doing, particularly in countries where we didn't have teams. So that was on the counterparty side. We found internally through the pandemic, what also changed is that before that we would have put together deal teams. Who can we find who are the right people, who are all in the same location so that they can co-locate in meeting rooms, whiteboards, do stuff together, and then COVID took that away. But it meant that we got much more into a habit, and for us, that stuck of having teams which are not necessarily co-located but are just all over the place, and it helped us to think about who are really the right person for this deal team in terms of professional capability and diversity of thought and backgrounds and characters. 

So that's something it's just becoming the norm for us to work quite virtually, even if some people are in office environments. And I don't think that's going to change or we're not seeing that changing even as we are coming back to the office environments. On due diligence, I think in our world, energy industry almost everything was already on virtual data rooms so that we did have, I remember physical data room in 2019, but the last one I saw and you know, we said they to get this is in India and for our manufacturing plant and we said they said we have a data in which is open said great we'll send the email addresses and they said what do you mean? Here's the physical address. But that was the last time. So, everything was already pretty digital in terms of data rooms. What we did though see was again, for us buying and selling off in production manufacturing facilities. The kind of smell test was always important for us to go see the facility or for buyers to come and look at our facilities and that was quite a challenge. And we thought initially, while we can do that, we'll send someone out and take some videos of an oil refinery or a production facility and put that in the data room. And then we got feedback from buyers in that case as we were selling. Yeah, that's nice. But, of course, you're showing us the good bits and you're not showing us the bits which are not in good shape.

And, so we, we were able to address that with the Google glasses or MS Teams glasses. And so the first time we sold a refinery in Denmark and the buyer all the way through till after signing the binding agreements had never visited the facility, but they were able to sit in their office location on video screens, and we had then our operators in the refinery and our buyers were able to say, Can you go up those stairs and can you go closer to that and can you turn around?

So really almost remote controlling that physical due diligence that they were doing in there. And so I think in all of that, I mean, that changed how we were doing diligence. I think for us in all openness, it didn't change very much how we were doing that documentary due diligence in data rooms. A lot of it was more the relationships parts and the physical parts of the due diligence, which wasn't possible when we're all stuck in our bedrooms, on laptops.

Matt Wells

Interesting. You mentioned the facility tours aspect and how do you replace the, you know, the process of going and inspecting a site? We definitely did see during that period the average size of a data room expand dramatically because

Niall Keppie 

all of those MP4 files!

Matt Wells 

They were doing all of those, or management team interviews. And those were all going to the data room because you couldn't do that face to face anymore.

So yeah, definitely was commonplace during that time. I want to move over to Matthew and talk the legal aspect. I think, you know, one of the findings of the length of due diligence and correlation with deal success was this finding of a, you know, the Goldilocks effect, I think we call it, of the happy medium, which had had a, a nice correlation between deal success and a lower premium paid by buy by the buyer.

Obviously, it's sometimes difficult to to balance that and have both. I'm curious from your standpoint, how do you balance thoroughness of due diligence with also speed to try to achieve an outcome like that? 

Matthew Bowen 

I think it's for my experience, it's a case of kind of really trying to be measured in what you needed to look at. So, there's nothing worse than for any kind of management team who's involved in a diligence process receiving, you know, a 35 page information request list.

This clearly off the shelf, not tailored to the business, half of which is completely irrelevant. If they're a software startup that's then and got 25 questions about environmental liability for their one licensed premises that they have. So, I think clearly, you know, trying to be targeted in what you need to know and ask is going to be is in every party’s interest.

Your clients are going to appreciate you racking up lots of cost on looking at things are completely relevant either. So, once it's not going to then lead to consternation among management teams of being asked lots of questions that they know have nothing to do with the business. So, I think really investing that time in sort of understanding with if you're acting on the buy side, for example, what tare he real drivers of this business, what makes this tick, what are you really interested in?

And from a, you know, from experience in doing deals in that sector, hopefully we can be able to provide some steer as to what we think is sort of risk areas, whether that's, you know, regulatory exposure, whatever it may be. So I think it's kind of the combination of those two I think is sort of a really key thing.

You know, being setting sort of very clear, defined parameters is kind of what is the scope of our diligence exercise rather than sort of, you know, reacting to things that have speculatively being uploaded or what have you, knowing what you're looking at, knowing that you've sort of set an appropriate materiality threshold. Because if it's, you know, if it's a large-scale operation, then, you know, the classic example of the water cooler contract, you know, it's just doesn't matter, does it?

So, you know, I think clear parameters, targeted diligence questions, setting materiality and appropriate thresholds and just knowing key touchpoints and risk areas and just keeping that at the forefront of your mind, that should then hopefully lead to the fact that you don't sort of get into drawn out prolonged diligence questions that cause frustration on all sides, cause deal fatigue to creep in which then might lead to other factors that do affect value and deal success rates and things like that. 

I'm curious, Dulce, Niall, how cognizant are you of the ever-expanding time of diligence in a particular deal? And are you doing things to try to move it along just purely because the diligence piece is taking too long?

Or is that not necessarily a factor that you see driving a lot, a lot of impact? 

Dulce Mendonça

As I was listening to to Matt, I totally agree with them with the aspects of being, you know, what really matters is, is key to have that very clear at the start. In all fairness, that's also the role of the deal lead.

When you are on M&A, you need to really know what you're looking for and be very focused on what is your materiality thresholds, what are you looking at, what it matters and what it doesn't. The other aspect is that knowing the advisors that you have working with you and it's critical that you trust, you know, that they can tell you, you know, so to speak tell you the time rather than, you know, explaining how to make a clock and which can then, you know, I remember once looking at that data room and it was a transport deal and it had literally all the land permits and this was a transportation long road and on the data room. So that was, you know, not a very good sell side data room from that aspect, obviously it's easier but is not very informative. So, preparation is key as well when you are on the sell side and that you spend time before you launched a deal that you can then, you know, control the timetable that the buy side will spend on the on the analysis, on the due diligence and frankly will make the data room also smaller.

And these are some observations that I think some aspects that are really critical. But I think the the role of the deal team to deal lead, making sure that they keep the pace, and they have a clear strategy is really critical for making sure that the transaction happen Matt, I don’t know if you wanted me to if I went into the direction you wanted.

Matt Wells

Yeah, definitely. I mean, getting that type of real-life feedback to the, you know, the sort of general numbers that this study found is exactly what I'm most interested in. And the next sort of report looked into the impact of deal terms and looked at cross-border deals, public versus private deals, and definitely found a big discrepancy in length of time in that diligence period between public deals, which took 125 days on average, and private deals which took about 230 days on average.

And Val, I know when you sort of started to dig deeper into the data, you found that in private deals there actually ended up being almost 3,000 more files in the data room as compared to public deals and more than 100 additional users in private deals. Curious whether that surprised you when you started to dig into it? 

Valeriya Vitkova

I think yes and no, in the sense that when it comes to the requirements for providing information to capital markets by public versus private companies, we know that when it comes to public companies, there is the expectation that there is going to be a lot more transparency when it comes to information being shared with capital markets.

We have the regulation, the regulatory requirements out there. And so, when it comes to public companies, I think they tend to be larger in size and we have the expectation that there's going to be more transparency out there when it comes to due diligence. Also, because they tend to be larger, we know that there is going to be more reliance on advisors, external advisors.

We know that there's going to be more resource committed to due diligence. And so, when it comes to public companies, I think that we do expect that there is this commitment because of the ownership structure that they're going to be the resource commitment and the regulatory requirements that leads to there being more preparedness and then that's opposed to private companies or potentially smaller companies out there.

And I think that really highlights some of the drivers of the findings that we've generated in the sense that because of the lack of regulatory requirements when it comes to private companies, it is less compared to public companies, the amount of resources that you have to commit is less potentially you're relying less on outside advisors, external advisors.

So I think that can contribute to these finding that we see that due diligence when it comes to public versus private companies is less in terms of the intensity of information that's required, in terms of less of the length of the diligence process and less in terms of the impact on long term value generation. 

Matt Wells

And when you take another kind of cut at that data and you look at cross-border deals, whether they're public or private, we found that just the nature of the deal being a cross-border deal adds on average another month to the time in that period diligence period.

Niall, I'm curious with your experience working on, you know, many cross-border deals in the energy space, how do you attempt to accelerate that period while also trying, I'm assuming, to balance different local regulations and due diligence around all of that? 

Niall Keppie

Yeah. Let me just, can I just pick up on in the public and private an additional one that we saw in diligence in public companies as well is less stuff in data terms because as you say, more information already in the public domain.

So that stuff again. But also depending on the jurisdiction, there's less that's allowed to be shared from a public company. And even under NDA, if it's material nonpublic information that's difficult. So it's often tougher. But for public companies it can be this is what we can give you and that's it, and try and price it. So that that's also almost puts like a legal constraint on what we can diligence. 

On the cross-border ones. Yeah, we have I can understand no surprise I think that it takes longer the more complexities there as you say with local regulations, we also have with language is tougher. I think typically we will see if we are selling or others or selling if there are documents, the original documents are I mean, we tend to all do deals in English, but if the original documents are not in English, typically a seller will not want to provide translations into English because then they won't want anyone to place reliance on those translations.

So then it means either finding people that can read the originals or finding really good translators who can do that. And that's not straightforward, I guess AI in future will help us on that. But yeah, there is there is more friction there. Ideally, we find people internally who can can work across those different countries as well, but then it can often be advisers, then more advisors.

So, it might be an advisor who's a specialist in one country, but not in the other country. And so more advisors mean more coordination and more time to do the diligence as well 

Matt Wells

That makes sense. Any other comments on that from those who have worked on some of those?

Matthew Bowen

I suppose from the I guess the law firm angle, I think there's often some times if you're doing transactions in quite far flung jurisdictions, ignoring the obvious time zone own differences.

But sometimes this from our experience is a natural sort of, you know, need to we will get their due diligence reports because typically we like to sort of compile it and the client doesn’t want 15 diligence reports, usually they want one, so we'll have to kind of get it, compile it, digest it, understand it. That's naturally going to have more Q&A just between lawyers, because we need to understand what the report is saying, try and translate into okay, well, what kind of contractual protections do we need? What are the real risk areas we're driving out here? How big a risk is this in terms of, you know, how much of an emphasis do we need to place on this in terms of flagging this for our client’s attention that naturally just has more lead time 

Matt Wells

I want to move on to something else that we looked into as part of this study, and that's really around information control and specifically how that relates to deal leaks.

I'm sure we've all seen some of these deals that leak, and they obviously force the deal timeline to compress. You know, if it's a public company that has an impact on stock price and, you know, kind of a ripple effect after that. What we found in the study was that the leaks tend to not have any correlation with the virtual data room opening, which what you may think you get a bunch of users in a virtual data room, somebody gets wind of a deal, it starts to leak.

It actually is much closer to the time of the announcement. So we found that the leak is more correlated with the announcement time period. And we also found that they appeared to be intentional, which may be maybe intuitive, curious, you know, what measures dealmakers can take to help minimize the risk of those impacts. And when a leak does happen, how can that potentially even be an opportunity depending on what position you're in, in the deal, I can open that up to anybody that has a strong opinion there.

Matthew Bowen

I think the first thing I would say to that is that if you're dealing with a public company, then they would often have sort of, you know, a PR firm already engaged. So kind of whilst ideally the best thing is prevention's better than to cure, no matter what you what you wish to try and do in terms of the security around your data, If somebody is hell bent on leaking something, that is probably going to leak. But I think having a strategy sort of, you know, hopefully you never need to be used. It's one of the things you'd like to pop on the shelf at the start of the transaction and hopefully never use, but having a clear strategy as to, okay, well, if you know scenario play what where's the leak coming from?

Is it a sort of speculative inquiry or was it sort of somebody from, you know, the times who saying, we're running this tomorrow, you've got one. This is what this is what we're going to say. And any comment when, you know, it's probably a little bit more serious. So sort of scenario playing that, knowing kind of how we go into react and also knowing, I think, well, what are we going to say?

Because I think your line of messaging to your I guess, take an example of a PLC, your line of messaging to your employee group is likely going to be very different to your shareholder group. If you know where you're focused. Shareholder groups are probably going to be if you're you know, it's going to be on how this is going to be a great, great sale.

This is kind of the, you know, the financial metrics are going to have more prominence or as employees, naturally, you can have more focus on, well, what does this mean for me as an employee in this organization? What's the future look like? So, you know, I think tailoring your communication strategy to your audience, I think, is also kind of an important thing to have in mind. And a good financial PR firm, of course. 

Matt Wells

Yeah, it's good advice. And any other thoughts on that topic? 

Niall Keppie

I mean, we put in place lots of things to avoid unintentional leaks and technical behavioural measures that works pretty well. I agree. It's really tough to prevent intentional links. Yeah, and I think something we've had a less when we've been been buying, but if we are selling that typically again production industries. So we'll have lots of staff who are involved and are impacted and that jobs are involved. So that's really sensitive. But typically we will often, as we get closer with potential buyers and also through management presentations and later if we seek to speak with potential buyers around how important it is that it doesn't leak in their interest as well, because then if they want to deliver their valued thesis in an industry which is also dependent on everyone who's working in that business, then it's really important for them of they want to put their best foot forward and how do they want to show up as the new buyer and motivate and get everyone enthusiastic about the new ownership? And if they don't do that, but it leaks and they're on the other side of the world and they're just on the back foot, that's not in their interest either. So I think that's something where I guess we feel that there can be from time to time people will try and play games. But if we can try those who are serious to get to a place, it's not only in our interest that things don’t leak, but in yours as well, then I think we we believe that helps.

But yeah, we've struggled to completely eliminate it as you can also see in the newspapers, 

Matt Wells

it's moving a little bit more towards the role of of technology in the M&A process and how that's continued to evolve. Obviously now VDRs, shocked that you're in a physical VDR in 2019, but obviously they're becoming more and more, you know, commonplace to the extent that it's, you know, probably in the high 90% of deals have VDRs and we've seen VDR usage and particularly the users that are part of a VDR grow by, you know, 64% for about from a decade ago.

So a lot more parties, a lot more people using the VDR, you know, what would you guys say are and Dulce I'm curious your opinion first are sort of the benefits and limitations of of these types of technologies as they become more prevalent? 

Dulce Mendonça

I think one driver is how specialized people become in terms of are they just doing certain part of the due diligence and has also in terms of the sophistication, you have more areas to cover, people more specialized. So naturally you're going to have bigger teams. I think is also linked to what Niall was saying, that we want to make sure that we have the best people involved. So, there will be teams that are maybe located in another region and that just covering that particular analysis because that's why they are they are experts and they have experience.

So because it's now easier to a certain extent because you're not limited just to the to the people that are, let's say, just based in London, they can be based anywhere in the world. They can be involved in the transaction. So, it's actually quite easy to assemble these teams and the temptation of making these teams quite large is probably high, but then it becomes the work of the the deal coordinator, and the deal lead. Then it becomes even more important that you need to make sure that everyone is working towards the same objective. They know what they're solving for. They know the timetable. You probably end up spending a lot of time and coordination meetings. That's the flip side as well. So, getting the balance right, I think it's the secret sauce 

Matt Wells

Makes sense. And, you know, I know we're coming up on time here but one question I did sort of want to go down the line here before we open it up to Q&A. Is around AI. You probably knew that was coming, but I think we're all sort of starting to get our feet wet with AI in our daily lives and where it's most practical applications are. And M&A is obviously not going to be immune from that. And ideally, it's going to be a big benefit, but also comes with some risks and challenges as well. I'm curious in your case Val just your thoughts on where it can be beneficial. And then in the rest of the panels case where you may already be using it or experimenting with it and where you possibly see it going in terms of impacting the process?

Valeriya Vitkova

Yes, I think that's it’s a really good question in the sense that I've heard from talking to M&A practitioners a lot of excitement about the applications of AI. But at the same time, there is skepticism when it comes to actually bringing a AI into the functionalities of the M&A process. So, we have the situation where we have a very good understanding of how AI can facilitate the deal process, but are we confident enough to implement it and then to make decisions on the basis of information that's provided by a AI?

And so that's where I see the big challenge. So where I see a lot of opportunity out there is when it comes to particularly the VDR the virtual data space is where we can implement artificial intelligence functionality to help us to, first of all develop more in-depth insights. So looking at how we can gather information much, much more in-depth and detailed information about strategy evaluation, so AI can help us in terms of getting unstructured data.

So, for example, voice, video, language, interpretation of data. And so that can really help us to decipher strategy, valuation kind of insights. So that's where I see one of the areas where AI can help, particularly with in VDR, like implementing that within the functionalities of VDR. And the other one is automation, so one is insights. So, AI can help us in terms of depth of information that we can get.

Then the other one is in terms of automating like the reports that we can generate. So for example automating contracts, automating strategy reports. And so AI can help us to automate tasks that typically are higher kind of labor intense, repetitive level of tasks in this other area is in terms of forecasting. So when it comes to being able to predict what will be the outcomes in terms of regulatory changes, for example, or changes in terms of the technological advancements, changes when it comes to how customers or competitors might react to developments.

So AI can help in terms of being able to predict forecast developments going forward. So I think that when it comes to artificial intelligence, we can think about deeper insights, automating and also being better able to forecast how we can generate value from transactions. 

Matt Wells

Lot of potential there for sure. Curious if you guys have started to experiment with it? Has it become, you know, ingrained in the process yet? Still kind of taking a wait and see approach?

Matthew Bowen

I think we're probably in the latter. We are having sort of we are working with companies at the moment to really explore how can we bring AI particularly into our diligence process because I think has been touched upon, there is an element of churn. As much as I love due diligence as a corporate lawyer, it can be quite a labor-intensive process.

So anything that we can bring in that, you know, using the classic example, if there's if we’re tasked with reviewing top 50 customer contracts, it is an AI platform that we can work with to say these are the key touch points, this is what we want and we can press a button and that can be generated, you know, much more quickly than the 50 hours it would take some of our junior lawyers to do that’s going to be, you know, I think in everyone’s interest, particularly for clients who we can pass cost benefits onto as well. So, I think, yeah, the automation aspect I think is something that I think will be really sort of key improvement to diligence processes and could really help sort of, yeah, bring down the timeline of diligence processes as well.

Niall Keppie

Yeah, that's absolutely something we'd like to see more of and I think that would be it would be great — early stages for us, I think we've also had things like if we're putting an early stage video management presentation in the data room, then we'll use then AI to do the first transcript that we then manually go through. So, but I would say more time saving efficiency things, not yet so much going into forecasting, more sophisticated things yet.

So looking forward to that. 

Matt Wells

How about at Infrared?

Dulce Mendonça

We’re starting to use for, say, first drafts of certain reports or certain things that are quite limited in terms of scope, so not really taking it, I would say not really taking it serious yet. So in a way just saying, okay, what can it do if we ask this task? And we say Okay that was a first draft was, was interesting. So, I think we still at this very early stage not really yet having a real use of it, but I think we are very excited what it can, how we can evolve. 

Matt Wells

And it's still early days and interesting see that everybody is sort of dipping their toe the water and in a different way for proof of future use case.

And so I think we have time for a couple of questions, right? if there are any in the room we're happy to do is any we do have a microphone, anyone has a question, so go right at the front. 

Q1

Yeah. Thank you. Yeah, first just kind of an observation which will lead to a question. I was glad to hear Niall here because Niall and I can probably remember the days of PDRs or physical data rooms and virtual data rooms.

So first observation, then a question, you know, one observation you, you mentioned about the lead time on deals, and I think VDRs were kind of the trigger for that because they elongated the due diligence process, if we think about the days of physical data rooms, we took in a team, you had a team a limited time, go in the room, look at the documentation, due diligence time was very limited, we had to come out with it with a yes / no. Do we want to, on the buy side, make a bid vid. VDRs opened up to a lot more information. The deal teams became bigger and we had to point them in the direction of, where do you have to look to get us from the what to the so what phase and so what do we do?

So I think that elongated the lead time now the question is on AI, you know I love that when I saw  AI here is the question of the capability of it or I saw it is is there an opportunity from the panelists for both efficiency and accuracy, efficiency because I thought, look, with all that information that's going into the virtual data room, how can we point these people as to where they need to look and why?

Can you start using, say, large language models or generative AI to look through and say, take either the structure, unstructured data, synthesiae it, tell them where to look. The other is, I think, Valerie, you mentioned it, which is can you start picking out areas that might indicate something you want to look into like using supervised machine learning to look at saying where are the elements of the financials of this transaction odd, or maybe they have patterns or characteristics of things that might be concerning and call those out.

So, my whole thing is it can it decrease the lead time because yes, virtual data rooms have been a double edged sword. They've elongated lead time because there's just more information there. Can AI do that? And do you see those two opportunities between look, synthesising through large language models and maybe some supervised machine learning to look at, finding out where the problems, where do I need to look other problems?

Are there patterns or characteristics in the financials I need to look at? So observation / question on those two areas of AI

Niall Keppie 

Yeah. So, for me we could absolutely imagine both of those areas. And the I mean, interesting that you're already getting into that report synthesis part of it and also then then using it to be able to, to go through and use the machine learning through there as well.

We haven't quite got why we haven't really started doing that seriously yet, but I think it's yeah, it feels like that will be coming next, I guess will be an interesting question also for us and I don't know what it’s like for you guys, but how do we find a way to test that? And it's sort of taking some I don't know, some guinea pig deals and I could easily imagine the first times we do it, the probably almost shuddering it, it feels to me a bit like, well, do you trust a self-driving car?

And I'm really not going to have a steering wheel or do I just it will be interesting. I could imagine. I mean, I would be surprised, I think, in five years’ time to have a discussion like this and we'd still be saying the same thing. I would expect we are going to be a lot further. 

Matt Wells 

Any other questions in the room, by the way, I might know somebody that can help you guys with that too.

Q2

You know we talked about the deal time extend so why do we think that was and what do we think we can do to shorten it. 

Matt Wells

Good question, I've got a few thoughts. I mean I think there's just compared to the study that we released a decade ago which covered the prior five years, right. There was a lot less ESG, wasn't a topic the world, you know even though it doesn't seem like that long ago was a simpler place, there was less to diligence. So that's that's part of it. It was less less specialized in terms of the diligence teams and all of the individuals that were part of a virtual data room.

And I think a combination of that plus additional regulations and GDPR and, you know, things that need to be redacted and translated as just all added up to really extend that length of time, What can be done about it? It doesn't seem like it's a toothpaste back in the tube situation. I don't think the world is getting simpler, but I think technology is getting smarter and I think the conversation we just had around AI will will help to, you know, maybe not drastically decrease the timeframe of diligence, but as more and more things probably get added to the table, too, diligence will likely start to at least not see that time expand on a pro-rated basis, at least that those are my thoughts. I don't know. 

Matthew Bowen

I completely agree. I think on this gentleman sort of I think you've hit the nail on the head that there is just more information to review and we're not going to reverse that trend. I can't ever see that happening. The people are going to start providing less information.

So, it's how do we review that information more quickly and effectively? And so I think that's where yeah, that's one of the key drivers why I think it's taking longer. I think from a legal perspective as well, there are greater as a very general sweeping statement, there is greater regulation in the world now than it was ten years ago and a sort of very classic example of that we see a lot of deals these days is sort of foreign direct investment regimes on cross-border transactions that, you know, it's the U.K. equivalent been sort of National Security Investment Act and seeing how those regimes are now popping up sort of throughout sort of Europe in another

in other countries, some of them are sort of very much in their infancy. So people are still getting to know the regime. So, trying to work out when it applies, that needs a lot more thought, a lot more collaboration with the applicable regulators, lots more back and forth in Q&A. I think as those regimes become more sophisticated and even the legislation in some of the areas improved, we had a horrendous experience of the an Austrian FDA regime recently where people just did the lawyers just couldn't tell us exactly whether our transaction failed or not, which you probably find very surprising, but just that kind of thing where as that regulatory environment becomes more familiar in these sort of jurisdictions and people become more familiar with working with it, then we will hopefully get through transactions more quickly as well. 

Q2

It’d be really interesting to know how long it takes the seller to actually populate the data room with the information and then how long it takes the due diligence teams to then review that documentation because then you're going to get a really good understanding where the time is taken.

Because personally from my experience is that most sellers go into the process not actually being ready, not having all the information to hand to either inexperienced or very busy in their working life. So it'd be really interesting to know those two time periods. 

Matt Wells

Think We can take one last question. 

Q3

Hello. I have one. Infrared, probably with the announcement of the budget, U.K. budget, how do you think the impact for the private equity community will be? Very general. Question, but what's your first read through it and how much are you still analyzing it? How really it will impact the industry?

Dulce Mendonça

Thank you for the question I'm thinking about. So, in terms of the I would say that the budget was not something that was, you know, like front of mind or in terms of the radar, obviously is important. But at the end of the day, we are quite diversified in terms of exposure countries, sectors. I think the drive for better infrastructure is there but we are not just exposed to U.K.

I think tax is a big component but is not something that, you know, when you are investing out of various structures a global firm, I think you in a way you have different options in terms of how you can structure investments on a global basis. But indeed, I think that what is happening at that level does have an impact on how you conduct transactions.

I think we agree that the world is not becoming simpler in terms of the structuring of deals. It's quite a bit component in terms of the time that we spend on due diligence, which is not something we would do. You know, 20 years ago when we were probably taking more a simpler view. I still remember the days of physical data rooms as well, right at the beginning of my career.

I think the first deal was a, a physical data room. And I remember we had the week to do everything. So I don't remember spending that amount of time just looking, say, for example, structuring to make sure that we are maximizing them, or optimizing the best, the best structure for one single investment. 

Matt Wells

We should have had it an example of a physical data room set up outside so everyone would experience the banker boxes and all of the paper.

But thank you guys so much for your time. I want to thank the panel for their time and their insights and thank all of you for that, for the questions that I believe we still have more cocktails and bites out there. So, I'm sure if there are additional questions, happy to answer them outside. But thank you all again.