The Due Diligence Playbook: How Private Equity Pros Navigate Complex Deals

What does it take for a private equity (PE) firm to transform a target from a deal thesis to a high-performing portfolio asset delivering returns for limited partners (LPs)? What advantages do PE firms have over their corporate counterparts?

In this episode of The Dealist, we unpack the playbook fund managers rely on to evaluate opportunities, manage risk and lay the groundwork for a successful exit — all beginning with rigorous due diligence.

Host Catherine Ford sits down with two seasoned industry experts:

Paul Aversano, a managing director at Alvarez & Marsal
Michael Hanigan, a partner at Gamut Capital Management

Together, they explore how diligence is evolving, how dealmakers are adapting to uncertainty and what strategies top PE firms are using to navigate complex transactions.

Tune in for insights on:

• Where the diligence process is getting sharper — and where it’s getting harder
• How PE teams separate noise from real risk in today's data-rich environment
• How PE firms build an exit strategy into their earliest deal stages

Further reading: The Dynamics of Due Diligence

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Transcript

CATHERINE FORD: Welcome to The Dealist, your insider's guide to the complex world of M&A. My name is Catherine Ford, and I have been joined today by Paul Avazano, managing director at global professional services firm Alvarez and Marcel, along with Michael Hannigan, a partner at private equity firm Gamut Capital. Good evening, gentlemen. Thank you so much for joining me today on this podcast. I'd like to jump straight in and talk to you about how private equity funds navigate the really complex environment of deal making at the moment. And Paul, I'd like to come to you first of all, jumping straight into the topic and find out from you how do you feel that private equity funds approach to due diligence differs to that what we see from corporate

PAUL AVERSANO: Most private equity funds or what I'll just call financial buyers are also talking about family office or sovereign wealth funds. Most of the time, you know, they have a finite holding period. They're in the business of buying and selling companies. And that period is typically about 10 years. The first five years, they're investing the money. The second five years, they're harvesting those investments. In a corporate transaction, it's usually for more of a strategic reason to get into a new service line, a new geography. And unless you're talking about add-ons and private equity, but in a corporate transaction, corporations are much more concerned about holding things and integrating them for the long term.

PAUL AVERSANO: On the sell side, it would be segregating them out and separating them from a larger business. On the buy side, it would be a lot of merger integration, capturing cost synergies and the like. So two very different typically strategic objectives between a financial buyer, including but not limited to private equity and a corporate or a strategic acquirer.

CATHERINE FORD: Do you think that means that they look at different things, that they look at different data sets, they look at different pieces of information? Or is it actually that they're looking at the same pool of information but focus what they make their decisions on different pieces of information?

PAUL AVERSANO: It would be the latter. I mean, from a due diligence standpoint, it would be generally evaluating the same things. But as far as what the plans for the business are, that's a whole different a whole different ball game. So their plans for the business would dictate the areas of focus. But as far as the underlying diligence, whether it be finance, accounting, tax, those are largely the same as a starting point, as a foundation, and then depending on the strategy, you go from there.

CATHERINE FORD: Okay. Michael, let me bring you in on this one. Does that sort of tally with your experience? You obviously come from this from a private equity background. Would you agree with what Paul says?

MICHAEL HANIGAN: Yeah, I completely agree. I mean, like I think at its core on both sides, we're trying to underwrite a business. There's just going to be inherent complexities that a corporate has to deal with that private equity doesn't some of which Paul named, you know, integration and day one planning. cultural underwriting, public company and board dynamics, DOJ considerations. This is just other stuff that corporates have to deal with that private equity doesn't. And I think when you get into an M&A process and you think about it from the perspective of a seller, speed and certainty outside of value are one of the most important things that a seller can value.

MICHAEL HANIGAN: And so we've built our model in the private equity community really around delivering on that speed and certainty. I think one of the benefits that we have at Gambit and private equity more broadly is that underwriting is really a core competency of ours, because it is our day job. And so when you think about corporates outside of some of the serial consolidators, their expertise is their day job, whether that's building products or packaging. And for us, we're looking at hundreds of deals a year. And so you benefit from reps, right? You gain speed, you gain efficiency.

MICHAEL HANIGAN: which, as I mentioned, are critical. And you can learn from your mistakes. The more reps you make, the more mistakes you make, and the more you learn from it and improve your process. You know, I think for us specifically, we've closed a deal from start to finish in as little as three weeks. I'd say that is at the most aggressive end of a deal-making process. But if you're trying to differentiate yourself in getting a deal done, sometimes speed is more valuable than actual headline value.

CATHERINE FORD: I think that's a really interesting point there that you mentioned, Michael, talking about speed. Paul, just sort of drawing on your experience of having worked both with private equity funds and with corporates. Do you think that in general, private equity funds can get through a due diligence process faster than a corporate or are there other situations? I mean, the situation that Michael described just now, a three-week process. I can't really imagine any corporate being able to do a due diligence process in that time. But could you share a little bit of insight from both sides of the spectrum?

PAUL AVERSANO: No, I think that's probably correct. I mean, again, different strategic reasons and the approach to the acquisitions. So if you're looking to actually hold a business for the long-term integrated capture cost synergies, that's a whole bunch of additional extra work that a corporate's going to have to go through. You know, also, you know, some of the points that Michael made, which are very good. particularly if the corporate or strategic acquires a public registrant, then you have the whole public process to go through. It just takes longer, possibly regulatory hurdles. So it's just potentially more often than not, it would be a longer process for a corporate to transact versus a private equity or a financial buyer.

CATHERINE FORD: Can you give us a little bit of insight, Paul, into how long and your experience at the moment due diligence processes take and how that compares to what we've seen in the past?

PAUL AVERSANO: Well, that's a great question. And I've been doing transactional due diligence for over 25 years. And one of the things I've learned is that the more robust or frothy the M&A market is, the shorter the diligence period tends to be. Because as Michael said, speed and certainty of closure are a paramount, particularly in a competitive auction situation for an asset. So when we first started doing transactions more from a financial buyer perspective 25 plus years ago, you would take 90 to 120 days. Everything was manual. There wasn't a lot of technology. Everything had to be done in person on site.

PAUL AVERSANO: We didn't have things like this where we could do video calls. A data room was an actual data room with data in it and boxes of data. You look at where we are today, technology is a big part of that. AI, we have tools at A&M that we use as a professional services firm that can help us digest data very rapidly, more accurately, more thoroughly. And I've seen in robust markets, I've had clients come to me and say, you have a couple of days to do diligence. Are you able to get it done? And it just depends on the timeframe, how much and how deep you can go with diligence, right?

PAUL AVERSANO: There's different levels. If you don't have a lot of time and you're willing, you know, for whatever reason, you know the asset and the investor is willing to accept a certain level of risk, we can do diligence where it's just, you know, hey, listen, this is what they told us. It's all conversation-based, but we haven't validated or verified any of the information. And there have been deals that I've done where clients have accepted that, right? Now, they're accepting a level of risk, whether they price it into the deal or not, it's a different story. The more time we have, we can actually validate management's assertions, right?

PAUL AVERSANO: And actually then make sure we actually go back into individual and original source documents and validate management's assertions in the financial statements. That's obviously a much more thorough due diligence process. But in general, at a macro level, the timing of diligence largely due to technology has very much become much more streamlined.

CATHERINE FORD: Michael, I'd like to bring you back and have a conversation that we started on right at the beginning of the podcast, looking at what specifically private equity funds look at during the due diligence process, but also maybe the things that they don't necessarily pay as much attention to as a corporate firm does. Can you maybe give us a little bit of insight from your perspective there?

MICHAEL HANIGAN: Yeah, you know, I'd say I think private equity firms approach diligence in different ways and like Paul mentioned, some of it is dependent on timing. I think for us, it's really non-negotiable that we're going to be comprehensive in our approach. Some of the ways that we can accelerate our timing will also be being comprehensive. is just our history with tracking certain assets. So we try to stay ahead of processes. So by the time a business is being lost or is being put on the market, we already have our thesis. We have a general understanding of the business.

MICHAEL HANIGAN: I'd say most importantly for our approach to diligence is we partner with operating executives for really every diligence process we're involved in. And so these are industry experts. We have a network of over 200 now who have worked in specialized industries. And so they'll accelerate our understanding of the business and help us manage that speed dynamic that I mentioned. But in terms of probably the work streams that are ongoing when we approach the diligence process. It's everything from business to financial and accounting to tax, legal, HR, IT, ESG, what it's applicable environmental due diligence. But you do have to prioritize what you're focused on, you know, doing everything at once.

MICHAEL HANIGAN: Sometimes you miss out on what's most important. And so business and financial and accounting tend to always be the primary drivers of value. For us at Gammon, we're a value-oriented investor. So for us, what that means is we're underwriting risk first. We need to get comfortable that a business needs to be stable and needs to be sustainable and sufficient through a cycle. And so we're focused on the downside protection. you know in our view it's more painful to to lose a dollar than to return a dollar so we're hyper focused on everything that can go wrong and the mitigating factors that exist and that's the same with our investment committee we go through early on what are the key areas of risk and concern that we should focus on collectively in a diligence process and then when the deal team goes through diligence we're constantly focused on how can we box or can we mitigate

MICHAEL HANIGAN: this risk Sometimes that's through investment structuring. Sometimes that's through operational strategies alongside our team of executives. You do need to pair that and take a balanced approach with also underwriting growth and upside. So equally important is looking at what are the commercial and the operational strategic initiatives that you can implement alongside of your industry executives. What does a successful M&A approach look like? Um, you take that entire comprehensive approach and ultimately, we're building models that look at different cases to assess the band and a band of outcomes. The inputs to those models come from everything from our business and financial diligence alongside someone like Paul's firm who's doing the accounting underwriting for us and some of the fp and a work for us to the tax diligence work to the consulting readouts to the operating executive readouts and then we take all these cases we review them rigorously as a deal team with the investment committee and then ultimately, we either gain or we lose conviction in the investment.

CATHERINE FORD: Paul, can I just bring you in and ask you about sort of the question of blueprints? I mean, Michael talked about priorities that they focus on. How much do you and your experience having worked with lots of different firms when it comes to due diligence? Do they rely on a blueprint? This is something that we check on every transaction that we do. And how much is it something that's very much individually related to the business that they're trying to buy?

PAUL AVERSANO: It is deal specific, right? And even client or financial buyer specific. But what I'll tell you is, you know, there's two blueprints, right? There's the pre-acquisition due diligence blueprint, which is what we're primarily talking about here. But what really folks like Michael and others are focused on is the post transaction value creation blueprint. It's like, okay, you know, as we're going into the investment at the same time, we're looking about how we're going to create value post transaction, right? And that is where, you know, A&M plays on both sides of there. We obviously have a very large and well-scaled global buildout, pre-acquisition due diligence practice.

PAUL AVERSANO: But when it comes to deep operational industry and functional expertise across our global firm, that's where we really help folks like Michael and the folks at Gamet create value. And as we go into the transaction as part of the investment committee, investment thesis, we're already looking at how we can add value post-transaction over a period of years. So it's very, very important. I mean, there's the blueprint on the PREAC, but there's also the blueprint on the POST Act.

CATHERINE FORD: Okay. Thank you very much. We're going to take a quick break there. And when we come back, we're going to spend some time talking about risk and how private equity funds approach risk.

CATHERINE FORD: Paul, maybe I can kick you off there, asking you, do you feel that private equity funds take a different approach to risk than corporates, particularly from the position of having that little bit more experience? For private equity funds, as we said, deals are day to day business. That's actually what exactly they do. Whereas on the corporate side, an M&A transaction might be a once in a lifetime experience. So, my question is, do you look at risk differently if you have that wealth of experience behind you?

PAUL AVERSANO: I think that's very difficult to generalize. Even if you just look at the financial buyers or the private equity side of things, we have hundreds of financial sponsors that we work with at A&M. and no two are alike. They all have different approaches to risk based on their value creation blueprint, what their investment strategy is, their investment thesis. On the corporate side, they obviously have a different objective, strategic acquisitions. And there's different risk profiles there as well. So I think it's very difficult. I wouldn't say one type of buyer focuses on risk differently more or better.

PAUL AVERSANO: clearly on the private equity side, to your point, they have a lot more experience in doing transactions, so they could probably, you know, they're in the business of buying and selling companies, so they bring that expertise. But you have some corporates that have large, you know, business development departments that some of which we work with, and they on the same hand have some significant expertise in how some of them are serial acquirers or disposing of assets. But they also either side is also engaging global professional services firms like ours and others to help in very specific areas.

PAUL AVERSANO: So, I don't think it's one or the other. I think they all just manage risk in a different way depending on the objectives.

CATHERINE FORD: Okay. Luckily, we've got someone here to talk specifically about risk to us. Michael, can you maybe talk us through how you approach risk, how willing you are to take certain risks? Where is the red line for you? Does that red line shift with changes in the global economic system and the global economic landscape, particularly as we're seeing it at the moment?

MICHAEL HANIGAN: Yeah, I would say kind of going back to diligence a little bit. Risk is something that is one of the first things that we look at and try to understand. And risk is important to assess over a cycle. So, it's not just important time risk. It's looking at risk and where you sit relative to some cyclical implications. But I'd say more broadly on the investor side, what our job really is, is to price risk and deliver attractive risk-adjusted returns. I think the challenges in today's environment, there's more capital and it's increasingly competitive with more private equity firms.

MICHAEL HANIGAN: There's corporates that you're competing with. And so how are you going to attractively price risk versus just taking on risk? I'd say for us, we're a little bit differentiated in our approach to investing. We have a very flexible mandate which allows us to structure investments in different ways. And so what I mean by that is we're fundamentally a control-oriented investor and we're seeking private equity style of returns. But we have a flexible mandate. So we invest in traditional LBOs, corporate car valves, structured growth and rescue financings, corporate JVs and spin outs. for control investments.

MICHAEL HANIGAN: We do it all out of the same fund with the same team. But what it does let us do is it lets us invest as an all weather investor and opportunistically deploy capital where we can find dislocation. So what do you have an expansionary environment? you know, our portfolio may be comprised of more LBOs and growth-oriented investments in a contractionary environment. We may invest in more distressed debt and structured rescue financing. So to bring it all together back to your original question is we are focused on properly underwriting risk alongside our team of executives.

MICHAEL HANIGAN: But we also bring unique structuring capabilities. So ultimately, you know, the intent is to create investments that have disproportionate downside protection and upside opportunities.

CATHERINE FORD: Let's move the conversation along a little bit and talk about how much considerations about the eventual exit from the business play into how you approach due diligence, things that you might consider during the due diligence process. Michael, obviously for you guys from the minute that you've bought something or that you have an interest, you're already thinking about, well, where is this eventually going to go? How are we going to exit this investment again. Do you feel that that makes you look at it slightly differently to a corporate that really has the intention of keeping it in its ownership for the long term?

MICHAEL HANIGAN: Yeah, absolutely does. I'd say exit is one of the most important things that we're constantly thinking about. And to Paul's point, it's not just pre-acquisition diligence, but it's also assessing what is your value creation plan and how is that going to ultimately help your exit both in terms of value and the breadth of suitors that you're ultimately going to get. I'd say one of the most frequent reasons why we end up passing on an opportunity in the early stages is an inability for the deal team to answer, what are we going to do with this asset and how is that going to help the exit?

MICHAEL HANIGAN: There may be businesses that just have Tams that are too small or the products are not differentiated. There's a risk of disintermediation. Something that's going to say in five years from now, how are you going to actually sell this business and deliver capital back to your investors? And so for us, our investors are always top of mind. There are customers and we're managing their money, which is a privilege. And I think increasingly we've heard that delivering distributions back to investors is paramount in what they're focused on. And so for us, going back to structuring, we've kind of changed the way that we've approached structuring, where we have a hyper focus on structuring investments that deliver distributions early to our investors.

MICHAEL HANIGAN: In our structure, in our distressed deals, for example, we typically have a portion of the investment that mechanically incentivizes an early redemption to our investors. We structure our LBOs if we can to deliver capital back to LPs during our hold period. We focus on executing sell leasebacks at a creative values. Last year, we deployed $250 million of capital and we returned USD 225 million of capital. We're focused on putting together a strategic plan alongside our operating executives to maximize the successful exit. But we're also focused on creative structures that deliver interim distributions to our investors through the whole period.

MICHAEL HANIGAN: So, in short, exit is paramount and something that is always thought about both pre-acquisition and during the ownership period.

CATHERINE FORD: If I can just be really cheeky and ask, are there situations where you've looked at a company and decided, actually, we can't see how we're going to exit it? Then one of your competitors buys it and you look at it and then you see what they plan to do and how they exit it. Then you think to yourself, well, hang on a minute, we didn't think of that or we would never have considered something because that's not something that we do. Do you ever go through that review process seeing the opportunities that you left on the table, how someone else executed on them?

MICHAEL HANIGAN: Yeah, I would say we're constantly looking at what we may have missed in terms of exit. I think sometimes it's how much risk are you willing to bear? So sometimes maybe someone approaches an opportunity and says this business in its current state likely will not have a successful exit or it will be challenging to sell it to another firm. But there's a strategic out there that may have interest in it. And so you're taking the bet that there's not a lot of suitors, but there's a couple out there that may have interest. And so it's just how much risk you're willing to be stuck with an investment versus how much upside there is to take that risk and try to sell to a strategic.

CATHERINE FORD: Do you ever think, oh, that's the one that got away? Is that a thought that you ever had?

MICHAEL HANIGAN: You know, we look at so many deals every year. I think we're lucky with the investments that we have in our portfolio and try not to throw too much on those.

CATHERINE FORD: Now, I'd like to wrap up this podcast by linking it to a piece of thought leadership that Interlinks did where we looked at which part of the M&A and dealmaking process the people that we surveyed felt would be most challenging in the months to come. Now, keeping in mind that this was done a couple of months ago, but at the time, The majority of respondents felt that financing would be the biggest challenge for them in dealmaking going forward. Paul, from your perspective of having worked with a number of clients, is that a consideration or is it actually due diligence that is the biggest challenge when doing deals at the moment?

PAUL AVERSANO: I would say in the clients that we work with and that I cover and speak to regularly, I think the biggest challenge is one, and I put these in order of significance, identifying deal flow in a very challenging, competitive environment. That's number one. And then right after that, close second is what I'll call the valuation gap between buyers and sellers, where sellers have a certain expectation that they believe their business is worth, or it may have been worth X many years ago, and they still think it's worth that today. And the buyers say no, there's a new normal and you need to adjust it.

PAUL AVERSANO: And how do we bridge that gap? So, I think sourcing deals and that valuation gap are probably two of the much more significant issues facing our clients today. Financing with the advent of private credit funds and you're not limited to the commercial banks and commercial financing anymore, there's a lot of private credit out there that's able to step in and fill those gaps, whether it's attractive or not. different issue, right? But, you know, deals can be financed. We've seen clients who are over-equitizing deals and then obviously down the road when they believe conditions will improve, they'll refinance some of that out.

PAUL AVERSANO: So, you can manage through, you know, some of those. You can put it this way, you can do a little financial engineering or change the capital structure to mitigate things and change how you went into a deal. But finding that deal and what you pay for that deal, that's it. Those are fixed, right? So finding the right opportunities, identifying them, and then proper valuation coming into the deal. Once you lock that in, you've got to manage that for the rest of that investment life cycle. So I think those are more challenging in my opinion. I'd love to hear what Michael says, but in my opinion.

CATHERINE FORD: Yeah, I'm keen to hear what Michael says as well. Michael, can we bring you into it?

MICHAEL HANIGAN: Yeah, I would agree with what Paul said. I mean, on the financing side, maybe the comment was more around gaining finance to reach valuations that are challenging to reach because the sellers are commanding those valuations. But valuation is far and away, I think, the most challenging thing to deal with in M&A today, meaning if you want to be disciplined and be a value-oriented investor, there are certain parameters that you're focused on. But those parameters may not align well with sellers' expectations. And a lot of the reasons why sellers may have these expectations is because they themselves paid too much for a business, especially when you look at what they really paid, meaning the quality of earnings in assets that are being sold and being bought, I think deteriorated probably over the last 10 years.

MICHAEL HANIGAN: That's why we work with great advisors like Paul. But there has to be a focus on what the true earnings of a business is and what the true cash flow is. And you've seen multiples go up, you've seen adjustments within EBITDA go up, and then you have a seller that's looking to exit, but for them to reach the return that they need to reach because that's what they promised their investors. the valuation that they have to sell these businesses at where these businesses probably had EBITDA that really was a lot lower than what they marketed because the adjustments didn't come to fruition.

MICHAEL HANIGAN: The valuations are unachievable. So that is the gap that we're continuing to deal with. The environment today is uncertain. So who knows when there will be a reversion. But I think from our lens, there should be and I think staying disciplined is the most important thing to do right now.

CATHERINE FORD: Thank you very much both to Michael and to Paul for sharing all your experiences and candid insights into what it's like to do a deal as a private equity fund and working with private equity funds. If you found this valuable please subscribe wherever you get your podcast from and feel free to recommend this to any of your colleagues and friends. That's all for today. Thank you very much and join us again for the next episode of The Dealist.