AI is Shaking Up the $Billions Private Equity Due Diligence Industry
For private equity firms, the hunt for the next big acquisition is a costly and time-intensive process. Millions are spent on external advisors – accountants, lawyers, and crucially, management consultants – to assess potential targets. But a new wave of startups, armed with artificial intelligence, is promising to dramatically lower those costs and speed up the process, potentially reshaping how deals get done.
The High Cost of Knowing: Traditional Due Diligence
Traditionally, securing comprehensive commercial research on a potential acquisition target meant engaging firms like McKinsey, BCG, or Bain. These consultancies conduct extensive interviews with customers, analyze market data, and deliver detailed reports – often exceeding 200 pages – that can easily cost between $500,000 and $1 million. The expense is justified by the scale of the deals, often involving billions of dollars, but it’s a significant barrier, particularly for mid-market funds.
Private equity firms historically delayed engaging these expensive consultants until they were highly confident in a deal, to avoid costs associated with failed acquisitions. This meant crucial insights were often gathered late in the process, potentially overlooking critical issues.
DiligenceSquared: AI-Powered Insights at a Fraction of the Price
Enter DiligenceSquared, a startup founded by former Blackstone principal Frederik Hansen and BCG private equity practice veteran Søren Biltoft. Launched in October, DiligenceSquared leverages AI voice agents to conduct customer interviews, providing PE firms with top-tier consultancy-quality research at a significantly reduced price point – around $50,000.
The company isn’t alone in this space. Bridgetown Research, a competitor, recently secured $19 million in Series A funding, demonstrating the growing investor interest in AI-driven due diligence. Both companies are applying AI-interview models similar to those used by consumer research startups like Keplar, Outset, and Listen Labs.
How it Works: From Interviews to Actionable Intelligence
DiligenceSquared differentiates itself by combining AI-powered data collection with human oversight. While AI conducts the initial interviews, senior consultants verify the accuracy and commercial relevance of the findings. This hybrid approach aims to deliver the speed and cost savings of AI without sacrificing the quality of traditional consulting.
The lower price point is proving to be a game-changer. PE firms are now willing to engage DiligenceSquared earlier in the deal process, gaining valuable insights before committing significant resources. This allows for more informed decision-making and potentially uncovers red flags that might have been missed with a more delayed approach.
The Broader Trend: Private Equity Embraces AI
This shift reflects a broader trend of private equity firms embracing AI to streamline operations and gain a competitive edge. Accounting firms are also seeing significant private equity investment, with a third of the 30 largest CPA firms in the US now backed by PE companies, driving consolidation and technology adoption. This influx of capital is fueling the adoption of AI-powered solutions across the financial services landscape.
The Future of Due Diligence
The emergence of AI-powered due diligence tools is likely to accelerate the pace of dealmaking and increase competition among private equity firms. By lowering the barriers to entry for comprehensive research, these technologies empower a wider range of firms to pursue acquisitions with greater confidence.
Expect to see further innovation in this space, with AI being used to analyze not only customer feedback but also market trends, competitive landscapes, and potential risks. The future of due diligence is likely to be a blend of AI-driven insights and human expertise, creating a more efficient and informed investment process.
FAQ
Q: How much does DiligenceSquared cost compared to traditional consultants?
A: DiligenceSquared charges around $50,000 for analysis that traditionally costs between $500,000 and $1 million from firms like McKinsey, BCG, or Bain.
Q: What is Bridgetown Research?
A: Bridgetown Research is a competitor to DiligenceSquared, focused on using AI to speed up the due diligence process. They recently raised $19 million in Series A funding.
Q: Who founded DiligenceSquared?
A: DiligenceSquared was founded by Frederik Hansen (former Blackstone principal), Søren Biltoft (former BCG consultant), and Harshil Rastogi (former Google engineer).
Q: Is AI replacing human consultants?
A: Not entirely. DiligenceSquared and similar companies leverage AI to automate data collection, but still rely on senior human consultants to verify accuracy and provide commercial insights.
Did you know? Private equity firms are increasingly investing in accounting firms, driving consolidation and the adoption of new technologies.
Pro Tip: Consider engaging AI-powered due diligence tools early in the deal process to gain a competitive advantage and build more informed investment decisions.
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