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Using Data Rooms in private equity due diligence. Why are some GPs taking a different approach?
LPs have been very vocal about wanting more transparency from their GPs. While Virtual Data Rooms make uploading lots of large documents possible, they don’t always provide LPs with the tools necessary to gain more insight into their investments.
At first glance, data rooms seem like the perfect solution for GPs who need to communicate important information to their LPs. But while they’ve been a common tool for more than a decade, data rooms alone are no longer meeting GPs needs, as many find themselves answering custom DDQ requests repeatedly, in addition to providing information through the data room.
This article will weigh up why some GPs are tailoring their approach and providing different information to each LP using custom DDQs alongside their virtual data room.
Why do GPs and LPs use virtual data rooms?
Investor portals are often referred to as Virtual Data Rooms (VDRs) or data rooms, which many GPs use as a more secure alternative to email. VDRs are a digital storehouse for data and allow a number of different stakeholders to access sensitive information.
Many GPs and LPs still use data rooms because they’re widespread and user-friendly. But some LPs find that the data they can take from a VDR doesn’t quite meet their requirements.
LPs have been very vocal about wanting more transparency from their GPs. While VDRs make uploading large documents possible, they don’t always provide LPs with the tools necessary to gain more insight into their investments.
If an LP can easily ask for custom information in a supplementary DDQ and receive it back in the same format they sent it in, that can be a big plus point. It makes life a lot easier.
The Pros and Cons of Data Rooms
VDRs have made the logistics of due diligence in mergers and acquisitions simpler over the past ten years, allowing LPs access to a central bank of documents 24/7. Virtual data rooms allow secure access to sensitive information, including projections, agreements, business plans, research, and inventories. But do they have a downside?
Here, we’ve compiled a list of the pros and cons of data rooms for GPs and LPs.
Pros of using a data room:
- Allow for fast access to time-sensitive information
- Allow ample secure storage for data heavy sensitive documents
- Efficient, allowing multiple LPs to assess information at the same time
Cons of using a data room:
- They don’t allow LPs to easily gain insight into the data – data often has to be manually transferred into Excel for analysis
- Some VDRs restrict printing, preventing hard copy review, which is easier for some to read
- GPs still end up answering the same supplementary DDQs again and again
- There can be security concerns about revealing the wrong information to the wrong people
- GP data in a data room may not have the same level of personalization as they would like to provide
Moving Beyond Data Rooms with Diligend
In the long run, there will always be a place for data rooms in the GP and LP relationship. After all, they’re a smart and efficient way to share large volumes of information. However, VDR vendors may need to address the cons listed above if they want to remain competitive.
That’s why tools like Diligend Respond are an intelligent choice. Diligend Respond allows GPs to automate the DDQ response process, holds the latest company response data, with a scale of how accurately suggested responses match the questions being asked in a DDQ. Diligend’s API’s mean it also integrates with data room technology to give GPs and LPs the best of both worlds. Qualitative DDQ questions can be answered quickly and easily. Diliged Respond uses Smart Response technology to automatically suggest responses based on how similar the question is to something the GP has answered before.
It works in place of, or alongside the data room and makes short work of custom DDQ responses. You spend less time answering questions you’ve answered many times before. Your LPs spend less time trawling through data rooms to extract the information they need.
Get in touch to see a demo or find out more about Diligend Respond, our GP DDQ response platform