due diligence

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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The Complex Dance of State Support to Non-State Actors

In today’s geopolitical landscape, the involvement of states in supporting non-state actors (NSAs) has become a multifaceted issue. States often provide support—both active and passive—to NSAs to achieve strategic objectives. This support can range from financial aid and military training to allowing the use of territory for hostile operations. Understanding the implications of such actions is crucial, especially given the legal and ethical gray zones they inhabit.

Legal Ambiguities and Historical Context

The practice of state support to NSAs is not new. Historical precedents during the Cold War, such as the U.S. support to the Contras in Nicaragua, shaped today’s interpretations of international law. In Paramilitary Activities (Nicaragua v. USA) (1986), the ICJ highlighted the distinction between direct and indirect state actions, underscoring the complexity of attribution. Despite the clarity in specific cases, the overall legal landscape remains confusing, with a tapestry of laws, treaties, and customary practices.

State Responsibility and Accountability

Establishing accountability when a state supports an NSA is challenging. Under the Articles on State Responsibility, a state may be held accountable for the actions of an NSA if it exercises effective control over them. This “effective control” standard, however, is stringent. The ICJ has noted that mere support or even decisive involvement is insufficient for attribution (Paramilitary Activities, 1986). Yet, support that extends to planning and directing operations should meet the threshold for accountability, highlighting the need for clear guidelines.

Current Hotspots: A Closer Look

Modern examples abound, illuminating the ongoing relevance of this issue. Iran’s backing of Hezbollah and Hamas, Russia’s historical support of the Wagner Group, and the U.S. alliance with the Syrian Democratic Forces showcase the diversity and impact of state support. These relationships are not just strategic but often provoke significant international tensions and humanitarian concerns.

The principle of due diligence requires states to prevent their territories from being used for harmful acts by NSAs. This principle, while not universally agreed upon, is crucial in cyber operations and physical intrusions. States must navigate the delicate balance between sovereignty and international obligations, ensuring they do not inadvertently support violations of international law.

Unpacking the “Use of Force“

Notably, when state support crosses a boundary into coercion, it can constitute a use of force, violating Article 2(4) of the UN Charter. The distinction between support and force is nuanced. For instance, arming and training may be deemed as uses of force, a perspective supported by both the ICJ and the UN General Assembly’s Friendly Relations Declaration.

Real-World Examples and Case Studies

Consider the case in which Russia, post-Wagner Group dissolution, absorbed the group’s activities into its military strategies. Similarly, the U.S. has had to grapple with the implications of its support to the Kurdish-led SDF in Syria. These examples highlight the dual-use nature of support to NSAs—often strategic but fraught with legal complexities.

FAQs: Clearing the Air

What constitutes “effective control” in state supports? It requires more than mere support, extending to directive control over NSA operations.

Is passive support to NSAs legally allowable? Generally, a state must ensure its territory is not used for hostile actions against other states, even passive support can be contentious.

Can humanitarian aid to NSAs be seen as state support? It depends on the context and intention behind the aid, often scrutinized under international humanitarian laws.

Call to Action: Stay Informed and Engaged

The dynamics of state support to NSAs are constantly evolving. To keep abreast of these changes and deepen your understanding, stay updated on the latest news, analyses, and legal interpretations. Visit [your website’s name] for more articles on international law and geopolitical trends, and consider subscribing to our newsletter for regular updates.

Did you know? The concept of state responsibility evolved significantly post-Cold War, adapting to new forms of warfare and political dynamics.

Pro Tip: For those interested in international relations, delve into case studies of state support in conflicts like Syria and Ukraine to grasp the practical applications of these laws.

DiligenceSquared uses AI, voice agents to make M&A research affordable