Private equity fund managers are accelerating deal timelines in an effort to win bids, and more than half say uncovering risk during due diligence is a main challenge to closing deals, according to BDO’s Fall 2021 Private Capital Pulse Survey.

The findings of the survey, which polled 200 U.S. private equity fund managers, underscore the frenzied state of deal making. Forty-two percent of fund managers say they are directing the most capital to new deals (up from 19% a year ago and 26% in the spring) and deal flow drivers are up across the board. Meanwhile, their pursuit of add-on acquisitions has fallen to 16% from 24% a year ago and 29% in the spring.

“To compensate for the slowdown in deal activity at the beginning of the pandemic, fund managers are racing to put committed capital to work and get deals done,” said Scott Hendon, Co-Leader of BDO’s National Private Equity practice. “Everything from private company sales to corporate divestitures is driving more deal flow. Add to that a healthy dose of external influences, such as a potential capital gains tax rate increase and a limited number of attractive targets to absorb all the dry powder on the sidelines, and you have a healthy amount of M&A deal activity—and competition—to contend with.”

Among the fund managers who identified a capital gains tax increase as the tax change they’re most concerned about, 59% said that in this competitive climate, they were accelerating the deal process to get to deal close more quickly. Moving faster to deal close is a top strategy among all fund managers to win bids, tying at 49% with highlighting industry or sector specialization, a differentiation tactic that has been on the upswing.

Concurrently, while they are positioning themselves to accelerate deal timing, 53% of fund managers say risk exposure uncovered during due diligence remains the top challenge to closing deals, followed by increased competition from other buyers (48%) and gaps between buyer/seller expectations (46%).

“Risk is top of mind for fund managers—not just during due diligence but throughout the holding period,” said Verenda Graham, Co-Leader of BDO’s National Private Equity Practice. “More funds are prioritizing cyber security concerns, for example, to remove risk that can discount the value of an asset at exit. Given the intensity of competition and high multiples, risk mitigation will be crucial to ensuring an investment’s value proposition.”

Read the full press release here.