5 ways to avoid hidden dangers in the private equity NDA process

Danger lurks behind a mismanaged NDA process, potentially delaying or ruining a deal. A mismanaged NDA process for private fund managers and investment banks often includes:

• Numerous rounds of revisions
• Strong disagreements over requested provisions
• Delayed responses to calls and emails
• Slow completion times

Internally, fund managers and banks might struggle with assigning ownership of NDAs and responding quickly to communications due to the workloads of their in-house lawyers and junior deal professionals. Outsourcing to their external counsel may not be much of an improvement despite the costs.

Let’s examine the risks inherent in a poorly managed NDA process and how an industry-specific contract negotiation solution can help private fund managers and investment banks avoid them.

Hidden dangers in the private equity NDA process

Slow completion times delay due diligence

An inefficient NDA process puts potential buyers at a disadvantage in terms of gathering material information and competing with other funds.

After private fund managers establish their fund strategies and begin sourcing deals, they want the ability to efficiently transition from interesting teasers to NDAs to data rooms. Managers are most concerned with their ability to conduct due diligence promptly, which requires a quick NDA workflow.

Unfortunately, several circumstances can hinder NDA execution, including:

• Lack of clear processes & negotiation guidelines
• Manual negotiation processes, including searching for and reviewing precedent and confirming negotiation preferences
• Lack of ownership over the NDA on either the buyer’s or seller’s side
• Waiting on in-house or external counsel to answer questions

While an investment bank’s delay might equally disadvantage numerous PE funds, a buyer’s inefficiencies put it at a disadvantage compared to fund managers that turn around NDAs quickly and gain access to the target company’s data room sooner.

Rigid NDA terms can prematurely end the deal process

A party out of touch with current market dynamics and unwavering in its demands can knock itself out of the deal process prematurely.

For example, a fund manager might call for particular terms, such as a residuals clause, that a target company would reject. Or an investment bank might include provisions that raise red flags for potential buyers, such as:

• Restricting the definition of representatives and who the buyer can share information with
• Limiting a manager’s conversations with industry contacts
• Requiring too long of a duration
• Demanding an over-inclusive non-compete provision
• Including a unilateral attorney’s fees provision
• Choosing an inappropriate state for governing law and venue

Either party’s refusal to consider reasonable alternatives may be the death knell for a potential deal. Consequently, there’s one less potential bidder in the investment bank’s auction process, and the manager has one less deal to consider in a competitive market.

Poorly managed NDA negotiations create reputational risk

A private equity NDA often sets the tone for what it will be like for the two parties to work together. A challenging process can create a preference for a seller to work with a different fund manager or for a buyer to walk away from a target company and pursue a different deal.

Depending on a fund manager’s processes and internal bandwidth to manage a high volume of NDAs, it might rely on deal professionals or outside counsel to negotiate these agreements. Both situations can have negative consequences.

Unprepared deal professionals might not fully consider future risks to the firm when agreeing to NDA provisions. Outside counsel might be better prepared to consider risk but are often unresponsive, fail to understand terms material to the business teams, or are too rigid during negotiations.

From an investment bank’s perspective, a poorly managed sell-side NDA process could increase clients’ risks and drive up costs. If overall deal execution falls short of clients’ expectations, it hurts the bank’s reputation and might damage its future business prospects.

5 ways to improve the private equity NDA process

By leveraging an AI-powered contract negotiation and management solution, fund managers and investment banks can efficiently manage a high volume of NDAs and other routine documents.

1. Measure internal bandwidth

Evaluate the organization’s bandwidth to manage NDAs and other repetitive agreements in-house. Have routine contracts become too time-consuming or distracting from other work?

Organizations can consider legal outsourcing when routine agreements divert in-house lawyers or business professionals from mission-critical work. For instance, Ontra’s human-in-the-loop Contract Automation solution combines reliable AI with a global Legal Network of independent lawyers who reliably and quickly process NDAs.

Firms that want to continue handling these agreements in-house may benefit from a complete software solution for negotiating and managing NDAs, such as Ontra’s Accord. Accord is AI-powered contract negotiation software to streamline these workflows.

2. Formalize the NDA workflow

Firms can improve the speed at which they complete NDAs by establishing a defined process, including determining ownership, clear negotiation guidelines, decision-making power, and escalation points. A set workflow that drives efficiency is essential whether routine agreements are negotiated in-house or outsourced.

3. Adopt AI legal tech

Manual contract processes tend to be tedious, time-consuming, and costly. An AI-powered contract negotiation solution can automate processes and accelerate turnaround times.

Ontra’s Contract Automation equips Legal Network members with an AI-backed negotiation solution to quickly and efficiently process NDAs for buy- and sell-side customers. Accord equips in-house teams with Ontra’s end-to-end contract negotiation software so our customers can drive the same level of efficiency when negotiating repetitive contracts themselves.

4. Use reasonable, on-market terms

Fund managers and banks can foster an efficient process through an NDA playbook that outlines preferred and fallback terms. When establishing the contract playbook, organizations have the opportunity to review what is commercially appropriate.

Additionally, Ontra’s Contract Automation and Accord solutions enable organizations to monitor terms across their NDAs. Tracking these terms enables firms to identify trends and leverage precedent in future negotiations.

5. Prioritize consistency

Fund managers, investment banks, and their outside counsel can underestimate the importance of an NDA at the beginning of a new relationship. While a mismanaged NDA process can tarnish an organization’s reputation, an efficient process can boost it.

Organizations that don’t have the bandwidth to insource NDAs or the desire to pay expensive outside counsel can gain consistency through a legal outsourcing provider. For those firms that need to outsource, it’s helpful to put NDAs in the hands of lawyers who can see them through from start to finish.

Accelerate NDA negotiations with Ontra

Private markets professionals need every minute they can spare to focus on deal-making and generating value for investors. They don’t have time for slow, manual contract negotiation processes. Ontra’s reliable AI powers Contract Automation and Accord — solutions that enable organizations to streamline and accelerate their contract negotiation and management workflows in-house or through outsourcing to Ontra’s global Legal Network.