Due diligence software provider Dasseti recently joined the ESG Data Convergence Initiative as an ESG Data Partner. Liron Mandelbaum, COO, speaks to Private equity Wire about the challenges of regulation, and the opportunities and complications facing the sector today…
HW: How are current economic conditions affecting the private equity market?
The current economic climate of high inflation, rising interest rates, and market volatility is creating a complex environment for private equity while the abundance of dry powder capital and the need to deploy funds is driving continued deal-making. However, GPs are facing stiff competition for assets which can inflate pricing. There’s also greater scrutiny of purchase price discipline. Due diligence is more critical than ever for private equity firms. LPs need robust analysis on GPs and portfolio companies before investing. Our software helps streamline these DD processes so LPs can evaluate risks and opportunities thoroughly. For GPs, we provide solutions to monitor portfolio companies, especially on ESG factors which are growing in importance.
HW: What has been the most significant change you’ve observed in the private equity industry in the last 12 months?
The most substantial change has been the shifting macroeconomic environment. A decade of historically low interest rates, and accommodative monetary policy have given way to aggressive tightening from central banks to combat high inflation. This dramatic swing created turbulent public market valuations and has led to a shift towards more sophisticated, data-driven due diligence. With increased macro uncertainties, LPs are conducting deeper DD on GPs before committing capital. GPs are also closely tracking portfolio companies on financials, operations and ESG metrics.
HW: Which are the most significant challenges in the private equity industry right now and how can they be best mitigated?
With an abundance of dry powder in the market, GPs face stiff competition for attractive investment opportunities, and providing tailored, qualitative information in RFPs and DDQs during the fundraising process is a great way to shine.
With high valuations and abundant capital, delivering superior returns is increasingly challenging. Using smart technology to keep costs down (headcount) and speeding up or automating operational processes can be one way to innovate.
Secondary Market Growth brings useful liquidity but also greater pricing and deal complexity. Valuing secondaries grows more difficult with information asymmetry and varied buyer-seller motivations. These complexities can be mitigated through greater transparency, standardized processes, and the development of industry valuation benchmarks to account for the diversity of motivations and objectives.
HW: Has your firm been prioritising ESG and sustainability – why/why not?
There is a growing imperative for GPs to integrate ESG factors into their investment processes As a technology provider we work with individualized metrics and can incorporate industry standards as they change. Our GP clients select the frameworks and metrics that mean the most to them and their LPs, either through existing templates, or their own metrics. Often firms already have a process that may not fit the framework of any standardized process regulatory, or software provider prescribed, so a flexible data collection platform like Dasseti ESG is a popular choice.
Dasseti has become one of the very first ESG Data Partners under the ESG Data Convergence Initiative. We have partnered with EDCI to enable the initiative benchmark to be viewed directly within our platform. This consolidated view will be invaluable to our LP and GP clients.
Sustainability and Impact Teams using Dasseti will be able to spend more time on high-value tasks. Our platform flexes to meet clients’ own requirements and workflows to help them meet their present and future sustainability goals.
HW: Are there ongoing or planned regulatory shifts for private equity firms to be mindful of?
New regulations like SFDR in the EU require much greater transparency on ESG from private equity firms. Our software helps clients collect ESG data and generate reports that can help meet compliance mandates imposed by SFDR.
Outside of ESG, the SEC’s cybersecurity rules, adopted in July 2023, require both public and private companies to comply with numerous incident reporting and governance disclosure requirements. Private equity managers are starting to realize the importance of conducting cybersecurity due diligence for portfolio companies. Failing to do so could lead to issues with the duty of care framework set forth by the SEC.
There are new rules and amendments by the SEC to the Investment Company Act of 1940. These are a significant expansion of the SEC’s regulation of private fund advisers and will create substantive compliance and reporting requirements that are more detailed and potentially more burdensome than is currently required from registered advisers to funds that are subject. The focus of the new rules is to require funds to disclose more information about their fees and certain expenses, as well as require quarterly financial disclosures and annual financial statement audits for each fund they advise to be distributed to investors.
Liron Mandelbaum, COO, Dasseti – Liron has extensive experience in financial services, having worked at Bloomberg LP for 17 years in the market data, analytics, and the brokerage division, where he was the head of sales operations and marketing. At Dasseti, Liron has helped build the client success function by working with over 100 of the world’s largest allocators to implement modern fund and 3rd party due diligence processes the leverage automation and analytics. Liron Mandelbaum has a Master of Business Administration (MBA) from Columbia Business School, a Bachelor of Arts (BA) in Economics from Rutgers, The State University of New Jersey-New Brunswick, and a Bachelor of Arts (BA) in History from Rutgers, The State University of New Jersey-New Brunswick.