Interim CIO: Dr. Claus Michael Sattler
OT due diligence
The 10 worst pain points of a private equity firm during OT due diligence
In the world of corporate takeovers, technological assessment is playing an increasingly important role. While the focus has long been on IT systems, operational technology (OT) is becoming increasingly important. However, OT due diligence poses numerous challenges for private equity firms. Here are the ten most serious problems that investors face in this process.
1. outdated OT infrastructure
One of the most common issues that private equity firms discover during an OT due diligence is outdated infrastructure. Many production facilities and industrial control systems are often decades-old legacy systems that are not only inefficient but can also pose significant security risks. Modernizing such systems often requires extensive investment, which can significantly reduce the expected ROI.
2. lack of OT security
At a time when cyberattacks on industrial systems are on the rise, robust OT security is essential. During OT due diligence, private equity firms often find that security measures in the production environment are inadequate. This can range from a lack of firewalls between IT and OT networks to inadequate access controls. Fixing these security gaps can be costly and carries the risk of production downtime during implementation.
3. lack of scalability of the OT systems
Private equity companies often invest with the aim of growing the acquired company quickly. During OT due diligence, they often come across systems that are not designed for this planned growth. The lack of scalability can significantly limit the company’s production potential and make expensive system conversions necessary.
4. inadequate OT data management
Data is also critical in manufacturing, but many companies struggle to effectively manage and utilize their OT data. During OT due diligence, private equity firms often discover siloed data stores, inconsistent data formats and a lack of data integration between OT and IT. This not only complicates the analysis of production value, but can also hinder the future use of data for predictive maintenance and process optimization.
5. lack of integration of OT and IT systems
In many cases, private equity companies discover during OT due diligence that the target company’s OT systems are not sufficiently integrated with the IT systems. This leads to inefficiencies, data silos and increased operating costs. Integrating these systems can be a complex and costly endeavor that reduces the value of the investment.
6. insufficient OT documentation
Thorough OT due diligence requires comprehensive documentation of the OT infrastructure, processes and policies. Unfortunately, private equity firms often find that this documentation is incomplete or outdated. This not only makes it difficult to assess the current state of OT, but also to plan for future improvements and integrations.
7 Compliance problems in OT
In an increasingly regulated industrial world, compliance with safety and environmental regulations is critical. During OT due diligence, private equity firms often uncover compliance gaps in the manufacturing environment that can lead to significant legal and financial risks. Addressing these issues can be time-consuming and costly and can significantly impact the value of the investment.
8. lack of OT expertise in management
Another pain point that private equity firms often identify during OT due diligence is a lack of OT expertise at the management level of the target company. This can lead to an underestimation of the importance of OT investments and a lack of strategic alignment of the production technology. Recruiting qualified OT leadership can be time consuming and costly.
9. high technical debt in the OT
Technical debt also arises in OT when short-term solutions are preferred to long-term, sustainable approaches. During OT due diligence, private equity companies often encounter significant technical debt, which manifests itself in the form of inefficient production processes, unstable control systems and high maintenance costs. Eliminating this debt can require significant investment and reduce expected returns.
10. inadequate OT disaster recovery and business continuity plans
Finally, during OT due diligence, private equity companies often find that disaster recovery and business continuity plans for the production environment are inadequate or non-existent. This poses a significant risk, as system failures or data loss in OT can have catastrophic consequences for production operations. Developing and implementing robust contingency plans for OT can be time and resource intensive.
Conclusion: The importance of thorough OT due diligence
The pain points listed illustrate how important thorough OT due diligence is for private equity companies. It not only helps to uncover potential risks and hidden costs in the production environment, but also provides valuable insights for post-merger integration and long-term value creation.
Effective OT due diligence requires a holistic approach that takes into account technical, operational and strategic aspects of production technology. Private equity companies should rely on experienced OT experts who are able to penetrate the complex technological landscapes of modern production environments and make precise assessments.
It is also important to place the results of the OT due diligence in the wider context of the overall transaction. Technological challenges in production should be weighed against other factors such as market position, growth potential and synergy effects.
Ultimately, thorough OT due diligence can make the difference between a successful investment and a costly failure. In an increasingly digitized and connected industrial world, understanding and properly assessing a target company’s OT landscape is no longer optional, but a critical success factor for private equity firms.
By anticipating and addressing the pain points described here, private equity firms can optimize their due diligence processes and make informed investment decisions. This enables them to minimize risks in the production environment, identify hidden value and ultimately achieve higher returns for their investors.
OT due diligence may be complex and challenging, but it is an essential tool in the arsenal of any successful private equity firm. In a world where manufacturing technology increasingly determines the success or failure of industrial companies, it is the key to unlocking hidden value and ensuring sustainable investment success in the manufacturing sector.
Sources
- https://www.vc-magazin.de/blog/2024/11/13/herausforderungen-und-perspektiven-fuer-die-zukunft/
- https://www.pwc.de/de/private-equity/private-equity-wie-sichere-deals-und-transaktionen-gelingen.html
- https://www.grantthornton.de/themen/2024/herausforderungen-bei-der-umsetzung-der-esg/
- https://ma-review.de/artikel/das-technologische-minenfeld-meistern-wie-technologie-ueber-den-erfolg-von-private-equity-investitionen-entscheidet
- https://www.bvai.de/fileadmin/Veroeffentlichungen/BAI_Publikationen/BAI_Private_Debt_Studie_geschuetzt.pdf
- https://www.vc-magazin.de/blog/2021/10/26/herausforderungen-an-die-tax-due-diligence/
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Dr. Claus Michael Sattler
