Although the private equity (PE) deal volume has declined 30% YOY, it may burst in upcoming years as private equity firms have accumulated over $1 trillion in dry powder, ready to seize profitable investment opportunities. 

Historically, PE has been one of the high-yield investment approaches, generating an average of 10.48% in annual returns to investors. It outperforms many industry benchmarks, including the Russell 2000 and S&P 500. 

PE success comes from several factors, but the main one is strong decision-making and accuracy in evaluating potential investment opportunities. To make informed decisions, PE firms conduct private equity due diligence.

What is private equity due diligence?

Private equity due diligence (DD) is a thorough investigation of a target company conducted by a private equity firm before investing. 

PE firms pursue the following goals with due diligence:

  • Deal sourcing. PE funds map potential investments to weed out target companies fitting their strategic objectives. 
  • Industry breakdown. PE firms investigate the target companies’ markets and industry specifics to understand their perspectives on particular investment goals.
  • Financial assessment. Investment teams evaluate the target companies’ financial well-being to determine the deals’ feasibility and total value.
  • Opportunity analysis. The deal team uncovers the target company’s potential to create value, scale operations, increase revenues, and generate higher ROI for the acquirer and its investors. 
  • Risk mitigation. DD teams reveal the target company’s weak spots and mitigate potential risks.

How to prepare for PE due diligence?

Successful PE firms take the following steps to prepare for the due diligence process:

  1. Develop your fund’s investment criteria. Create a desired list of traits a target company should have to be a strategic fit. Consider the business size, revenue, EBITDA margins, ESG opportunities, value propositioning, etc. 
  2. Set up DD governance. Assign due diligence teams to supervise, manage, and execute the process. Involve industry specialists to direct and supervise investigations in unknown niches.
  3. Define a due diligence framework. Decide on the due diligence methods and tools. Consider financial analyses, on-site inspections, and document reviews as key investigation approaches.

Why is the quality of earnings (QoE) analysis crucial?

Private equity firms often hold existing portfolio companies for several years before selling them. Such investments are illiquid during this period, typically between three and five years. Contrary to public transactions, the firm cannot sell shares and realize the profit whenever it wants. As a result, this approach carries inherent financial risks, especially with leveraged buyouts (LBO), when 90% of the investment is borrowed from investment banks.

Therefore, each private equity investment decision requires careful financial planning and a professional quality of earnings (QoE) analysis. It reveals how much ROI the target company can generate and evaluates several financial parameters, including the following:

  • Operating margin. It shows how the target company generates revenue from its core operations, considering the cost of production.
  • Net margin. Net profit divided by total revenue indicates the company’s level of cost control and its ability to generate ROI.
  • EBITDA (earnings before interest, taxes, deprecation, and amortization). It evaluates whether a company can generate cash flows regardless of various circumstances, including ownership changes.
  • Historical trends. It identifies earnings patterns and evaluates the consistency of the company’s earnings over a long period.

Private equity due diligence checklist: Key areas

A PE firm emphasizes the target company’s financial and commercial aspects, evaluating its ability to grow and increase revenue. DD teams typically investigate business functions that maximize growth and focus on obstacles that may hinder said growth. Here is the sample list of the target company’s aspects a private equity fund may review during due diligence.

Due diligence areaSample PE due diligence checklist
Industry due diligenceuncheckedTarget company’s industry trends and challenges
uncheckedIndustry’s competitive dynamics
uncheckedRecent industry transactions
uncheckedIndependent industry research reports
Financial due diligenceuncheckedFinancial statements
uncheckedBalance sheets
uncheckedIncome statements
uncheckedCash flow statements
uncheckedGross and net margins
uncheckedAccounts receivable and accounts payable
uncheckedTangible and intangible assets
uncheckedCurrent or future liabilities
uncheckedInventory levelsuncheckedCapital structures
uncheckedDebt obligations
uncheckedService profitability
uncheckedOperational expenditure breakdown
uncheckedWorking capital cycle
uncheckedDebt and equity ratios
uncheckedStock-related information (for go-private deals)
Tax due diligenceuncheckedTarget company’s taxation policies
uncheckedTax returns
uncheckedTax obligations
Legal due diligenceuncheckedCorporate structure
uncheckedArticles of incorporation
uncheckedOrganizational charts
uncheckedAnnual reports
uncheckedSupplier and distributor contracts
uncheckedIndependent vendor agreements
uncheckedCustomer contracts
uncheckedLicense agreements
uncheckedLoan agreements
uncheckedJoint-venture agreements
uncheckedPartnership agreements
uncheckedLease agreements
uncheckedProperty titles and deeds
uncheckedPast, current, and pending litigations
uncheckedSettlement agreements
Intellectual property due diligenceuncheckedCopyrights, trademarks, patents, and trade secrets
uncheckedIP licenses
uncheckedIP assignments
uncheckedIP infringements
Human resources due diligenceuncheckedWorkforce analysis: roles and skills
uncheckedEmployee engagement: turnover, satisfaction rates, engagement initiatives
uncheckedKey employees and their impact on business growth
uncheckedEmployee handbooks
uncheckedEmployee contracts
uncheckedBenefit plans
uncheckedPension agreements
uncheckedLabor disputes
Operational due diligenceuncheckedOperational processes
uncheckedSupply chains
uncheckedMajor suppliers
uncheckedQuality control procedures
uncheckedProduction capacity
uncheckedInventory levels and inventory management practices
uncheckedOperational improvements: cost reduction, process optimization
uncheckedRisk management strategies
uncheckedOperational processes
uncheckedSupply chains
uncheckedMajor suppliers
uncheckedQuality control procedures
uncheckedProduction capacity
uncheckedInventory levels and inventory management practices
uncheckedOperational improvements: cost reduction, process optimization
uncheckedRisk management strategies
Technology due diligenceuncheckedIT policies, procedures, and documentation
uncheckedIT strategies and technology roadmaps
uncheckedIT infrastructure: servers, data centers, hardware
uncheckedSoftware systems and applications
uncheckedProprietary software
uncheckedCybersecurity systems
uncheckedCybersecurity measures and best practices
uncheckedTechnology adoption in operations
uncheckedIT systems efficiency
Commercial due diligenceuncheckedMarket health
uncheckedMarket saturation level
uncheckedCompetitive landscape
uncheckedTarget company’s positioning
uncheckedMarket and segmentation
uncheckedBrand awareness
uncheckedBrand reputation
uncheckedBusiness model
uncheckedCustomer base
uncheckedBusiness impact of key customers
uncheckedCustomer service policies and processes
uncheckedCustomer relationships
uncheckedCustomer turnover rates
uncheckedCustomer lifetime value
uncheckedProducts and services list
uncheckedValue proposition strategies
uncheckedMarketing channels
uncheckedSales channels and sales strategies
uncheckedDistribution partners
uncheckedPricing strategies
uncheckedRevenue models
uncheckedTotal addressable market (TAM)
uncheckedProduct and service demand and growth potential
Management due diligenceuncheckedManagement team’s experience and track record
uncheckedLeadership style
uncheckedCorporate culture
uncheckedLeadership succession planning strategies
uncheckedManagement team’s performance
uncheckedManagement team’s approach to risk mitigation
Regulatory due diligenceuncheckedRegulatory restrictions
uncheckedESG compliance
uncheckedData privacy compliance
uncheckedRegulatory filings
uncheckedCompliance reports

What makes PE due diligence different from M&A due diligence?

Private equity and traditional M&A due diligence may encompass the same business functions of the target company. However, the objectives of traditional and private equity due diligence differ significantly. Let us dive deep into the main differences between PE and traditional due diligence. 

PE due diligence puts investment value first

Traditional due diligence usually occurs when an operating company acquires a target company, merges with it, or absorbs it entirely. According to PWC, mergers and acquisitions account for 80% of M&A deals, while divestments represent 20%. Strategic buyers pursue M&A to gain customers, diversify products and services, improve operations, etc.

An operating company conducts due diligence on a target company to extract the most value from the upcoming post-merger integration.

A private equity company is not an operating company but an investment entity that gains profit by acquiring, improving, and selling other companies. A PE firm doesn’t merge a target company with itself. 

Instead, it intervenes in the target company’s business to make it more attractive to future acquirers. Such intervention often includes a full management takeover or a merger with a smaller company (add-on acquisitions). Thus, according to Pitchbook’s report, buyouts and add-on acquisitions comprised 89% of PE deals in Q1 2023.

A private equity firm conducts due diligence on a target company to understand its growth potential and sell it at a higher price in the future.

As a result, PE due diligence emphasizes the target company’s investment value and improvement opportunities within various business functions. A private equity fund thoroughly investigates the target company’s financials, builds financial projections, and identifies cost-reduction and optimization opportunities. 

Data collection is more complicated during PE due diligence

M&A due diligence processes tend to be unproductive due to a lack of available data. This issue intensifies with private companies that have long been in the shadows of regulatory reporting. Unlike public companies, private businesses do not fall under many corporate reporting regulations.

Therefore, private businesses are not required to provide as much financial information as publicly traded companies. It complicates due diligence for financial buyers as just one investment decision requires over 80 assessed opportunities and three massive DD reviews. Leading PE firms may collect data from as many as 120,000 companies, accessing third-party data providers and reviewing millions of data points. And then confirm the findings during lengthy buy-side due diligence.

However, this may change with the SEC’s intentions to bring more transparency to big private companies, including unicorns valued at $1 billion, starting in 2025.

PE due diligence leverages data analytics more than ever before

The private equity industry has become highly competitive. According to the latest Accenture PE report, the number of PE firms has increased three times since 2010, while 50% of PE executives say deals are much more complex than five years ago.

To stand out, more private equity firms rely on powerful data analytics and operational value creation since financial interventions alone may not be effective. Data analytics in PE due diligence allows for the following:

  • More insightful deal sourcing. AI-powered data analytics tools enhance data processing and reveal more investment opportunities.
  • Higher data accuracy. Data automation software helps dealmakers cross-reference data points during confirmatory due diligence, ensuring informed decisions.
  • Stronger risk assessment. Analytics tools help to conduct scenario analyses and identify critical private equity transaction issues based on verified data points.

How do virtual data rooms help with private equity due diligence?

As much as 32% of successful PE firms rely on preconfigured solutions for due diligence, such as virtual data rooms (VDRs), based on Accenture’s PE report. 

Virtual data rooms are online repositories with dedicated capabilities for secure file sharing and due diligence. Preconfigured solutions allow PE firms to conduct thorough due diligence, save exit time by 8.3%, and improve exit value by 9.7% on average due to the following features:

  • Secure file sharing. Enable granular access control, dynamic watermarking, information rights management tools (IRM), and bank-grade infrastructure security.
  • Seamless collaboration. Manage due diligence checklists, assign DD teams, and work on a due diligence questionnaire using built-in file redaction, advanced Q&A workflows, in-app messaging, and task tools.
  • Powerful analytics. Have a bird’s eye view of the deal flow due to comprehensive audit logs, auto-generated drill-down project reports, and activity dashboards.

Top 5 virtual data rooms for private equity due diligence

The following industry-leading VDR solutions provide strong capabilities for private equity due diligence.

iDeals VDR

iDeals VDR provides industry-leading data protection and makes the diligence process simple, scalable, and efficient. iDeals offers cutting-edge security features, including eight levels of access control, IP restrictions, Fence view, and dynamic watermarking. You can improve due diligence processes using customizable Q&A with approver workflows, built-in redaction, audit logs, auto-generated drill-down reports, and industry-leading multilingual support, available on a 24/7 basis.


  • Free trial: 30 days
  • Pricing model: Fixed recurring subscription
  • VDR training: Unlimited with expert
  • Dedicated project manager: Yes
  • Customer service: 24/7 premium support
  • Security compliance: SOC 1/2/3, ISO 27001, GDPR, CCPA, LGPD HIPAA, PCI DSS


Datasite incorporates AI tools into advanced M&A workflows while ensuring top-notch security. Datasite users protect due diligence materials using a granular permissions system, IRM, and watermarking. Datasite users optimize due diligence using AI redaction, automated data categorization, due diligence trackers, and Q&A workflows.


  • Free trial: No
  • Pricing model: Per-page, subscription
  • VDR training: Dedicated with experts
  • Dedicated project manager: Yes
  • Customer service: 24/7 customer support
  • Security compliance: SOC 2; ISO 27001, 27017, 27018; GDPR; CCPA; AAP


Ansarada offers strong AI capabilities and security measures. Its users benefit from AI-powered due diligence insights, automated file structuring, and AI redaction. Ansarada protects sensitive files using IRM, session timeouts, watermarking, and granular permissions.


  • Free trial: Free limited version
  • Pricing model: Fixed recurring subscription
  • VDR training: How-to videos
  • Dedicated project manager: Yes
  • Customer service: 24/7 customer support
  • Security compliance: ISO 27001, GDPR


Caplinked emphasizes collaboration while offering reliable data protection. Caplinked users streamline due diligence using Q&A workflows, in-app messaging, customizable FAQs, and well-designed activity trackers. This VDR offers granular user permissions, IRM, watermarking, audit logs, and security APIs for data protection.


  • Free trial: 14 days
  • Pricing model: Fixed recurring subscription
  • VDR training: Personalized onboarding
  • Dedicated project manager: No
  • Customer service: Dedicated customer success manager
  • Security compliance: SOC 2, ISO 27001, HIPAA, HITECH, PCI SAQ-D, FISMA, Privacy Shield

DFIN Venue

DFIN Venue emphasizes workflow automation while ensuring top-notch data protection. DFIN Venue customers optimize due diligence with AI contract analysis, bulk document redaction, Q&A, and real-time deal reporting. This VDR offers reliable security measures, including IRM, two-factor authentication, file permissions, and watermarking


  • Free trial: No
  • Pricing model: Per-page
  • VDR training: One-on-one training with experts
  • Dedicated project manager: Yes
  • Customer service: 24/7 customer support
  • Security compliance: SOC 2, ISO 27001, NIST CSF, GDPR

Key takeaways

  • Private equity due diligence is a comprehensive investigation of the target company to make an informed investment decision and maximize value creation.
  • It’s crucial to set up a due diligence team, create a private equity due diligence checklist, and apply a QoE analysis.
  • Private equity due diligence emphasizes financials, markets, operations, HR, technology, commercial, and legal aspects of the target company.
  • Most PE deals are purely financial rather than strategic, with due diligence strongly emphasizing the target company’s ability to generate high ROI.
  • PE firms often face data collection challenges during due diligence since private companies do not disclose as much financial info as publicly traded companies.
  • PE firms leverage data analytics tools and data rooms to make informed decisions, create higher investment value, and beat the competition.