Those companies that had invested sufficiently in digital technologies were much better equipped to deal with remote working and closed offices. But the crisis also exposed any lamentable lack of investment by companies in such technology. This was true for companies across several industry sectors. But to highlight some of the common key issues, Drooms surveyed* professionals in Europe’s real estate industry, which is certainly a good case study for a sector known for its historical reluctance to ditch paper-based processes.

Limited impact

We wanted to examine how the pandemic had impacted the adoption of digitisation in the European real estate market. Our results showed that while the pandemic did have some impact here, the extent of it was more limited than we expected.

Just over two in five (41%) of our respondents said that the European property market had only been moderately influenced by digitisation over the six months to September this year. Although a minority, this was still the most common response. Around one in four (24%) believed that digitisation had had a major impact on the sector, with 28% saying it was ‘slight’ and 4% said ‘not at all.”

However, more than two in five (43%) of our respondents also said digitisation would increase the efficiency of businesses processes, and a further 30% expect that it could dramatically reduce costs while 27% said it could create significant competitive advantages.

Digital laggards?

Although traditionally seen as a technological laggard, the real estate industry does appear to have adopted digitisation to some extent. The highest proportion of respondents (37%) said they had digitised between 50% and 74% of their processes but only 1% said they had achieved complete digitisation of all processes. But no respondents said they had no digitisation in place or had no plans to introduce it in future. 

Key weaknesses

Our respondents were clear about what they saw as the key weaknesses in the technology currently applied in European real estate.

While poor network resilience and security have historically been key drivers of real estate companies’ reluctance to entrust customer-facing processes to new technology, these appear to have diminished in importance. The most common weakness highlighted by our respondents was the lack of integration between different systems and platforms used in the sector, which was cited by 44% of respondents. Almost one third (29%) also said that another key challenge is the lack of applications that are available to replace the paper-based processes that still pervade. But 11% still believed that poor network resilience is the biggest problem, while 10% point to inadequate security.

Key themes going forward

More than a third (36%) of our respondents believed that remote working will be the most important theme for the real estate market in future. The next most common theme cited by our respondents (28%) was the expected arrival of more integrated technology that will improve efficiencies across the whole real estate value chain.

These responses were entirely unsurprising. For some time, we have seen firms calling for greater connectivity in their business processes. But this greater connectivity requires the practical use of interfaces between software solutions.

At Drooms, we are facilitating this by opening up our application programming interface (API) so that our virtual data room (VDR) platform can connect to other systems, enabling asset managers to save both time and workload effort, and reduce costs.

Virtual Data Rooms

VDRs bring tremendous efficiency and an array of functionalities to M&As, IPOs and non-performing loan and real estate transactions as well as management of assets throughout their lifecycle. Launched around 20 years ago, they served as online versions of the physical spaces where confidential or sensitive information was held for review by authorised parties. They now provide a secure, online platform for accessing confidential documents and handling business processes with a range of added functionalities.

Huge shift

Although not as significant as might have been expected, the coronavirus pandemic has had an impact on the digitisation of the commercial property market. The industry has largely performed well despite the challenges, which is no doubt due to robust online systems having been put in place.

What our research does underline however is that companies do need to continue implementing digital solutions to achieve greater efficiencies, lower costs and higher productivity. To achieve this, firms should rigorously review their business processes to assess what can and should be meaningfully digitised to enhance business performance.

For the challenges will only continue as technology evolves. The pandemic has created a huge shift in how organisations manage their operations and this has exposed a substantial need to re-think data transfer needs.

Security and the speed of transfer have become key priorities to ensure the smooth running of remote working teams and IT departments must lay the groundwork to ensure large documents can be made available at any location via a structured storage platform to help teams continue working digitally and seamlessly.

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*The study was a quantitative survey using an online questionnaire consisting of seven questions. Customers and interested parties in Europe were invited to take part in September 2020 via email. A total of 538 real estate experts responded. The full survey can be accessed here: https://bit.ly/383EHYV.

The impending Brexit will also be a key factor driving M&A. Companies with sales in the UK and the European Union will have to decide whether they will still want a foot in both markets. Buying UK companies has become more attractive now because Brexit has weakened sterling and made UK assets significantly cheaper. Brexit has also made UK companies unloved, depressing their share prices and making them attractive takeover targets. But UK companies will have to factor in the extra expense of buying EU companies priced in euros if they wish to establish a presence on the continent.

M&A is making a comeback

The evidence pointing to increasing M&A activity is strong. Q4 this year has been the third strongest for M&A activity in two decades, according to the Financial Times*. So far, US$612bn worth of deals has been agreed in Q4, up from $461bn and $491bn in the same quarter in 2019 and 2018 respectively.

While the last quarter of a year tends to be the busiest for M&As as dealmakers try to close deals before the year-end, the number of deals will likely be even higher this year as the backlog of deals caused by the pandemic comes back into play.

The economic background is also supportive of M&A activity. First, the cash required for takeovers is readily available. With interest rates at all-time lows and expected to stay so for some time, it is easier for companies to borrow funds than ever before. Second, the subdued global economy means companies will be strongly tempted to boost their revenues via takeovers.

Certain sectors are more prone to M&A activity. For example, smaller listed companies will become targets because of depressed share prices, while hard-hit sectors such as leisure, tourism, travel and retail will see a lot of struggling businesses become takeover targets. Valuing companies will be harder in the uncertain environment though and buyers able to show flexibility in terms of valuations will be more successful.

As competition hots up in the M&A market, participants will need to ensure they have the right resources to lead the pack. Personnel and expertise are key of course, but they also need the right tools. And a tool that makes deal-making significantly easier is a Virtual Data Room (VDR).

Virtual Data Rooms add efficiency to deals

VDRs bring tremendous efficiency and an array of functionalities to M&A transactions. They began around 20 years ago as online versions of the physical spaces where confidential or sensitive information was held for relevant parties to view. They now provide secure online access to authorised users to conduct the deal process and come with a range of added functionalities.

The Drooms VDR, for example, can be set up quickly and easily, enabling users to operate in a fully regulatory-compliant framework immediately.

So far, US$612bn worth of deals has been agreed in Q4, up from $461bn and $491bn in the same quarter in 2019 and 2018 respectively.

All the required documents can be uploaded, and invitations given to various interested parties, who can be assigned different levels of control within a secure environment. For premium security, documents are transferred exclusively via an SSL connection with AES encryption and a 256-bit key length.

Extensive reporting features mean all activities conducted within the VDR can be tracked and by use of Optical Character Recognition technology, desired terms can be searched for among all index descriptions and documents, with all hits flagged to users. International deals can be made even easier by real-time translations of documents, with new languages being added regularly.

VDRs continue to make substantial technological progress. Some now even incorporate blockchain technology and artificial intelligence (AI). The former is particularly useful in keeping a ledger for legal purposes while AI can be instrumental in conducting highly efficient due diligence.

Due diligence is crucial

The due diligence aspect is pivotal. Being able to conduct due diligence as quickly and accurately as possible is crucial. Failure to do so is the prime reason behind the mistakes made in deals, both by acquirers and those looking to sell.

For sellers, a VDR can help optimise and smooth the due diligence phase. They help to impress and attract a range of buyers, maximising deal values and preventing unwanted surprises by improving the accuracy of historical and financial data and fixing existing discrepancies before negotiations start.

For buyers, optimising due diligence means they can more accurately assess the true value of a target company, for example, in terms of identifying and capturing synergies, resolving leadership issues and assessing how to merge systems and processes. It helps them to prepare fully before a deal closes and afterwards when the integration process must be put into effect.

Leading-edge tools are required

Fierce competition and pressure to do deals mean that players in the M&A market need leading-edge tools if they are to operate effectively. This will likely become all the more apparent in the New Year as Europe adapts to Brexit and recovers after the shock of the COVID pandemic. The winners in the M&A market will be those who ensure VDRs are their first tools to hand.

*Source: Global M&A recovers on vaccine hopes and US political stability, 17 November 2020

This industry has never been noted for leading technological progress. Its reliance on paper-based processes, even among the larger, better-resourced firms, is well known. Unfortunately, these technological shortcomings have been exposed in stark fashion as the COVID-19 pandemic forces most companies to rely on remote working and communications. This extreme stress test has made even some of the larger real estate companies realise their digital capabilities are woefully inadequate.

In particular, the crisis has revealed the poor quality of networks at many real estate companies and the low priority often given to data security and protection. This lack of security has even led in some cases to the ‘free’ software they use tapping into the data of users for advertising purposes. ‘Cookies’ and spyware can automatically collect individuals’ shopping and viewing habits via search engines to better direct adverts that provide revenue, raising concerns about organisations’ own levels of privacy and security, too.

Essential steps to digitalisation

If real estate companies are to take on board the lessons of this crisis and successfully modernise their digital systems, then they must:

• Improve the reliability and security of their IT systems.
• Vet their software providers, checking company registrations, legal entities and jurisdictions. Contracts must specify where data is stored, how it is saved and who has access to it.
• Ask IT service providers to prove the standards of their processes via certifications.
• Switch to mobile working and make more use of artificial intelligence (AI) and application programming interfaces (APIs).

Recognition of these challenges and appetite for change is certainly prevalent in the industry. New research commissioned by Drooms¹ found that two thirds (67%) of real estate professionals say their organisations’ efficiency would increase if their systems were to have seamless integration with third-party platforms that give them access to a variety of functionalities. Nearly a third (32%) believe this improvement would be ‘dramatic’.

API offers a seamless integration solution

A leading-edge solution for achieving seamless integration is an Application Programming Interface (API), which enables the interconnection of software systems and data between businesses and third-party providers, representing a major step forward in streamlining workflows. Nearly two in three (65%) respondents in our survey nominated APIs as the IT feature they would most like to see incorporated into the tech they use, versus 29% who cited ‘security’ and 15% ‘blockchain’. More than half (59%) of real estate professionals would like to see APIs improved, ahead of other tech features, such as security (41%).

Drooms has opened up its API to its clients, meaning they can seamlessly integrate their VDRs with a range of software systems. These systems include real estate market analysis software that enable clients to consolidate fragmented data and make immediate comparisons of their portfolios against the wider market. This means data-driven decisions can be made quickly without having to log in and out of several systems, draw on various information siloes or work between applications.

With so many staff having to work from home across Europe, the fragility of companies’ IT networks has been exposed. It is now clear that for teleworking to work successfully then companies must implement adequate software tools. They must invest in high-functioning and secure technology that is going to optimise current workflows rather than demoralise their staff.

These tools must reduce pressure on servers, include appropriate data file sharing and storage systems, solve any issues with document formats and make data easily accessible to authorised people and teams, enabling access via a range of devices e.g. browser, app, mobile, etc. This latter function can be problematic given that the security in place inside company firewalls is completely different from that in homes, presenting a tough challenge for many companies.

COVID-19 crisis is likely to change attitudes

Many real estate companies have yet to fully address these issues. While some generic file sharing and storage systems can help companies, these can only provide make-shift solutions. For a complete and secure set-up, companies should look to specialised services, and ensure they take great care in vetting their providers.

The COVID-19 crisis is highly likely to change attitudes and focus company leaders’ minds on bringing about such changes - especially when they realise that a lockdown could be re-instated at short notice for some time, possibly even into next year.

(1) Source: Survey conducted between 28 January and 21 February 2020 by PollRight. The panel of 34 real estate investors covers both fund managers and investors across Europe.

Despite the uncertainty, the need to find secure and stable income is still a priority for investors and Europe’s real estate industry does offer substantial potential to achieve this in 2020, even as it moves through the ongoing late cycle. Investors are certainly seeing potential in the logistics sector, for example, which has been expanding for some years now, thanks to increasing urbanisation and the continuing growth of e-commerce driving the need for the provision of first-rate distribution centres.

The offices sector is also growing as central business districts are developed in several major cities across Europe while it is no surprise that German cities are regarded as investment hotspots by global investors, who value the safety afforded by scale, liquidity and growing markets. The same applies to Lisbon because of its attractive development and investment opportunities. Additionally, increased investment flows are expected to come from Asia, and especially Japan.

But with the wider economy slowing, the reality is that although global investors remain positive about real estate, there are familiar concerns surrounding the scarcity of attractive assets. Indeed, most markets are certainly quieter at present than this time last year. Although European real estate remains highly liquid overall, expectations are lower regarding the availability of equity and debt as the industry navigates the late-cycle.

Global investment opportunities and changing attitudes

At present, investors are faced with the challenge of how to effectively deploy capital and keep a sustainable cash-flow because of the increasing demand, and therefore prices, of European core real estate assets, which are perceived as safer in the current environment. Several investors are also adopting a build-to-core strategy as an alternative approach to generate income, while alternative real estate assets and residential properties are also being considered as additional investment options. This demonstrates an industry that is slowly challenging traditional investment norms and looking at real estate more broadly while acknowledging possible risks.

Asset owners will need to adapt their assets or convert them to meet changing demands.

Downturn is likely to be relatively gentle

Although the end of the investment cycle does appear to be approaching, the slowdown is likely to be a gentle one. It is unlikely to be as severe as the one seen in 2008, which was caused by a rare, seismic event. And when the next downturn does occur, markets are likely to make a quick recovery.

Investors are sharpening and improving their investment strategies to prepare for the stuttering growth and end-of-cycle risks, though. They are diversifying the economic drivers to which their portfolio is exposed. For example, investors are now considering investing in the alternatives and residential assets as mentioned above. Investors may also decide to invest in multiple sectors rather than one. This does not mean that their views of the real estate sector have changed; they are simply taking precautions by acknowledging that now is not the time to make huge investments.

The fact that the Eurozone is currently regarded as a safer investment destination by global investors still holds true with some chronic challenges. Pricing and scarcity of attractive assets are still the major challenges for investors. This is only exacerbated by the economic uncertainty and geopolitical events in some European markets, and the ongoing decline in consumer confidence.

Technological trends in the sector

Apart from the end-of-cycle warning signs and the decline in consumer confidence, another factor that investors need to consider is technology, which is driving change across all industrial sectors, not just real estate. Mobile technology has major implications for the retail sector, while the concept of driverless cars has raised the prospect that parking structures may well be converted to office or retail spaces in the future. People’s attitudes on how they occupy space continue to change: the advent of the co-working and co-living concepts are having a dramatic impact on the real estate industry. According to a report by PwC, the shared office space market is now going through a revolution, with co-working offices on the rise and likely to account for 30% of corporate office portfolios by 2030.

The Eurozone’s performance in real estate over the last year has been weaker compared to two years ago because of a decline in yields.

Challenges and opportunities ahead

For many asset managers, rapid technological changes are threatening to make some assets obsolete. Asset owners will need to adapt their assets or convert them to meet changing demands. This is more apparent in the retail sector as the number of physical stores continues to decline. To remain competitive, real estate owners will need to become operational businesses and develop new skills. They will also need to be able to understand and meet different consumer needs and expectations.

Virtual data rooms offer key benefits to the real estate sector

But one technological development that offers major benefits for the real estate sector is the use of virtual data rooms (VDRs). It enables investors to take full advantage of market opportunities by enabling them to respond quickly. This is essential if they are to avoid the risk of missing out on a favourable sale. Just one missing document can sometimes block an entire deal, for example.

With Drooms’ VDRs, all incoming documents are indexed appropriately thanks to its ‘auto-allocation’ feature. Business processes such as mergers and acquisitions, commercial real estate sales and non-performing loans can be conducted securely, efficiently and transparently through Drooms TRANSACTION. Using this tool, authorised personnel can have controlled, online access to confidential data that are stored remotely. Additionally, our latest product Drooms PORTFOLIO facilitates intelligent and secure portfolio management of multiples assets throughout the hold phase, allocating bespoke data rooms to individual assets on a single platform. Its “transaction flag” functionality enables parties with admin rights to search and mark transaction-relevant documents for readiness.

VDRs also offer a solution to coping with the rise of ‘big data’, which represents one of the most significant challenges facing real estate market players. By tapping into big data, investors can enhance their decision-making across supply chains. But failure to do so, i.e. by not adopting the right technology, can lead to a severe loss in their competitiveness.

Yields are still attractive in Europe

The Eurozone’s performance in real estate over the last year has been weaker compared to two years ago because of a decline in yields. Nevertheless, global investors still see Europe as a haven for investment opportunities while expecting major disruption in Asia. The yields may have declined but they are still favourable versus the low-interest rates prevailing elsewhere and, despite the inevitable slowdown, there is still strong demand from investors for the right deals and investment strategies. Investors just need to remember that the right technology will be more indispensable than ever when the inevitable slowdown occurs.

Javier Meseguer has been appointed as General Manager Southern Europe. Based in Madrid, he will report to Steffen Schaack, Senior Vice President Global Business Development, and will oversee Drooms’ business expansion in real estate, corporate finance and M&A in Spain, Portugal and Italy.

Drooms has also expanded its UK sales team with the appointments of Ditte Nielsen as Senior Business Development Manager and Alessandra Azzena as Business Development Manager. They will report to Rosanna Woods, Managing Director of Drooms UK.

Alexandre Grellier, co-founder and CEO of Drooms, commented: “We continue to see a need for digitalisation among our customers. This not only means making documents available in digital formats but also by ensuring that entire work processes are digitalised. Our latest expansion is the logical next step in our support for customers around the world in this process. Our new offices in Madrid and Barcelona means we are ideally placed to tackle this need in southern Europe head on. As we see it, data protection and data transfer have no borders and we plan to continue our expansion globally in 2020”.

Steffen Schaack, Senior Vice President Global Business Development at Drooms, added: “Our new team members will strengthen our presence in their respective markets and develop further our relationships with customers. We are now widely recognised as the global, independent experts for secure data transfer and digitalisation.”

Javier Meseguer has 16 years’ experience in digital services and data rooms and has invaluable expertise in establishing sales networks. He previously worked as Director of Sales for Snowflake, a provider of cloud-based data rooms, as well as IntraLinks, SAS Institute and The MathWorks.

Prior to joining Drooms, Ditte Nielsen worked as Senior Account Manager at Merrill Corporation, a global SaaS provider for M&A. Alessandra Azzena arrives from Tableau Software, where she oversaw account management and sales in her role as Commercial Territory Manager.

Drooms has also appointed Dennis Kasch as Business Development Manager for the DACH region sales team, bringing its total number of employees across the European market to 170.

You can find our latest interview with Drooms specialists here.

Keeping the momentum going has never been easy, however. Historically, heavy competition pushes deal multiples to new highs, while the growing fears of an impending recession affect decision-making ranging from conducting diligence to exit planning.

For general partners (GPs), investing huge amounts of capital now comes with heightened risks. They are paying extra costs and looking to capture value that may not materialise post-close. To address this, Rosanna Woods, UK Managing Director at Drooms, suggests that the most effective GPs are scaling up their strategies by investing in diligence. 

Familiar challenges, more resilience

With heavy pressure to do deals, the global private equity market saw another rise in investment value last year. Increasing asset prices and competition continued to reduce deal count – the number of individual transactions in 2018 fell 13% versus 2017 to 2,936 globally. However, the total buyout value jumped 10% to over US$500 bn, marking the strongest five-year run in the industry’s history.

2018 was indeed a notable year for most GPs because of the resilience and strength in the current investment cycle, albeit with levels of instability. Since 2014, the market has seen higher annual deal values than in previous years, except for 2006 and 2007. Throughout this time, the PE industry has also benefitted from an unexpected wave of investor interest, low-interest rates and, mostly in the US and Europe, steady growth.

The number of individual transactions in 2018 fell 13% versus 2017 to 2,936 globally.

Investing in diligence

Yet PE executives are currently questioning how long the good times can last. While GDP growth in the US remains strong, Brexit uncertainties, global trade tensions and volatile markets are all fuelling worries that the cycle may soon end.

For PE firms, the main goal is to navigate the next economic downturn and profit from it when it occurs. With memories of the global financial crisis still fresh in their minds, firms are focusing their diligence on problem scenarios more than ever. They learned valuable lessons from the crisis about what lasts throughout the cycle and are looking to react accordingly.

Deal constraints

For most GPs, finding the right asset at the right price was the biggest challenge last year. They often faced high deal multiples, a lack of attractive targets and stiff competition. They are keen to do more deals, but when they do find attractive assets, they are faced by aggressive corporate buyers that increase prices for firms with synergies similar to their own. These strategic buyers often look for growth through acquisition of companies that fit their core strategy rather than financial metrics alone.

Inefficiency and costs also contribute to the challenges faced by GPs, particularly in sponsor-to-sponsor deals. These deals invoke high transaction fees and routes to value creation are less evident. Nevertheless, PE firms continue to find them attractive as they carry less risk and perform equally well as primary buyouts.

For sellers, it makes sense to optimise and smooth the due diligence phase with the help of virtual data rooms (VDRs). These are essential tools to help impress and attract a range of buyers, which can increase deal value and prevent unwanted surprises. For first-time sellers, VDRs give the advantage of increasing the accuracy of historical and financial data and fixing existing discrepancies before negotiations start. It is also true that PE firms depend largely on sell-side due diligence because it makes the process of the transaction simpler and helps them understand how the target assets could be integrated into their own.

For sellers, it makes sense to optimise and smooth the due diligence phase with the help of virtual data rooms (VDRs).

The calm before the storm

But the challenges for PE firms, as mentioned above, are not only limited to cut-throat competition or rising asset prices. The increasing pressure to do deals, economic uncertainties and an abundance of capital all represent end-of-cycle warning signs that concern firms. Experienced GPs are adjusting their strategies to win more deals within budget while preparing against a likely recession. They target sectors in which they have the most confidence, choosing carefully the auctions in which to participate or avoid, and which teams to assign to covering them.

By conducting diligence earlier, GPs can make more intelligent judgements while also creating contingency plans and implementing suitable actions when the next downturn occurs. This gives GPs a better understanding of where the attractive targets are in an asset class or industry and moving in swiftly as the cycle slows down.

Preparation is key

But common deal mistakes, despite the lessons of historical examples, can still happen. A common reason is that some firms may not see much value in carrying out due diligence. Although its relevance may depend on asset class, target company size and industry, performing due diligence remains an essential requirement for most GPs. This is especially true for acquirers and sellers with an aggressive sales strategy.

It is crucial for PE firms to be as prepared before a deal closes as they are after assuming ownership. Conducting the required due diligence and considering the necessary factors for a successful merger integration, such as identifying and capturing synergies, resolving leadership issues and evaluating merging systems and processes, are all key to success. This is even more so during a downturn. Effective GPs and winning firms will invest in thorough preparation and think about integration as soon as due diligence begins, focusing on how a firm can operate independently during the holding period, thereby converting time into value.

One sector at the forefront of this disruption is FinTech, in which firms enjoy cost bases lower than those of traditional banks and freedom from the restraints of branch networks and legacy IT systems. As such, they can provide faster services and more innovative products, thereby revolutionising systems and processes, says Rosanna Woods, Managing Director of Drooms UK.

Digitisation will be a priority for firms

FinTech trends have disrupted the industry for over a decade now, and I believe this is the year challenger banks will become prime targets for investors. Large FinTech firms – and traditional financial companies – will also be more likely to get involved in the M&A space as digitisation remains a major driver for deal-making.

In terms of funding, 2018 marked the best-performing year for UK FinTech M&A (US$457.8 billion), which shows that investors are still hunting for the next big FinTech investment. And although Brexit has brought a lot of uncertainty, it could also mean that investors have a lot of dry powder.

Prime examples of challenger banks gaining momentum include Monzo’s crowdfunding exercise and Revolut’s increasing user signups to its finance app that facilitates both worldwide currency and cryptocurrency.

In the digital payments space, we have already seen the roll-out of digital payment methods, particularly via mobile, allowing consumers to make payments at a single tap of a card or mobile device. As banks continue to seek technologies to speed up customer service, they will look to FinTech companies to integrate with their own systems and enhance customers’ experiences.

In terms of funding, 2018 marked the best-performing year for UK FinTech M&A (US$457.8 billion).

Core drivers for M&A

In many ways, growth in FinTech innovation and M&A transactions each contribute to their own success. Businesses and investors are both attracted to opportunities that technology could bring in the industry, and its potential to automate services. This leads to several M&A transactions taking place for geographical expansion and technological innovation.

But will Brexit impact or slow down the developments of financial technologies in the sector? In my opinion, only moderately, if at all. In fact, Blackstone’s acquisition of Thomson Reuters (US$17 billion) last year shows that transaction values increased due to businesses continuously embracing innovation in digital banking, payments, and financial data services.

Although Brexit may have some impact on investors’ confidence in the UK, it is possible that they are simply biding their time. It is common for investors to practice caution when investing in foreign markets. But despite the transactional and regulatory uncertainty we currently face in the UK, I suspect that investors will see the growth in the FinTech space as opportunities to invest in emerging technologies.

Technology’s broader influence

Technology is not just the focus for investment, it is also helping the investment process too. In particular, it has paved the way to making the due diligence process for M&A more efficient and secure. The creation and utilisation of virtual data rooms to help solve the problems faced by dealmakers and investors has been embraced by the industry as good investments.

From a technology provider point of view, artificial intelligence, machine learning, and analytics have digitised the screening process of deals and greatly reduced the time undertaken for due diligence, as well as improving workflow. This is also true for many other sectors such as real estate, legal, life sciences, and energy.

As such, it makes sense to predict more investment in technology that will help the digital transformation of businesses, as demonstrated by Siemens’ investment in software companies in 2007, which generated US$4.6 billion in 2016.

Although Brexit may have some impact on investors’ confidence in the UK, it is possible that they are simply biding their time.

The heightened desire of investors to acquire businesses for digital transformation remains – as previously mentioned - one of the core drivers for M&A. Although Brexit may eventually present unexpected challenges to the FinTech sector, it will continue to thrive. This belief is supported by a report by Reed Smith that stated 31% of financial organisations plan to invest over US$500 million in the FinTech sector this year.

Opportunities amid uncertainties

Taking stock of the aftermath left by the EU referendum, Brexit has undoubtedly created lingering uncertainties and ever-present threats to deal making. But the overall value of UK M&A activities between 2017 and 2018 shows that Brexit did not prevent UK M&A from performing. In fact, over 140 M&A transactions in Q1 2018 were FinTech deals.

This was due to many factors, such as the strong relationship between UK and US investors, as well as the pound’s devaluation after the EU referendum, which made cross-border deals more attractive for global investors and particularly those deals involving businesses specialising in RegTech and digital payments.

Although the on-going Brexit negotiations are not going well and that a no-deal Brexit, despite not being ideal, is still a real possibility, recent history suggests that the FinTech M&A sector will not be as heavily affected as it might seem. The signs indicate that investors will continue to pursue new technologies that can help make business operations more efficient.

Going forward

What concerns businesses and investors in the UK is the fear that London may lose its crown as a FinTech hub. They will be looking for a Brexit deal that replicates the passporting rights the City currently enjoys and would also allow the UK economy to grow by about 1.75% by 2023 (as firms continue to trade in the City).

Moving forward, the difficulties Brexit presents are not insurmountable for the FinTech sector. It will continue to grow and disrupt the industry – whether the UK leaves the EU with a deal or not – and although it is wise to make contingency plans, businesses should avoid making drastic decisions. The FinTech sector is here to stay and it is well-equipped to withstand the many challenges ahead.

Blockchain has been synonymous with crypto currencies for some time but its range of applications and roles in the wider digital transformation are now much more fully understood. This is certainly true of the financial industry, which is gradually shaking off its legacy systems and incorporating this revolutionary technology into an ever-growing number of uses.

Blockchain is correctly described as the technology behind crypto currencies, recording transactions made between parties. But its key and unique feature is its capacity to provide an undisputed audit trail. It establishes an incorruptible digital ledger of transactions that can be programmed to record every data item of value.

In practice, Blockchain acts like a single spreadsheet copied thousands of times across a network of computers. This spreadsheet can be updated on a constant, real-time basis and is shared identically across the network.

Using Blockchain, two strangers can conduct business with no need for a third party, while creating a legally-indisputable record of an agreement. As such, there is no point of weakness at which data can be corrupted or hacked. This issue is of growing importance for those players involved in deals in which adding more contact points increases vulnerability exponentially.

Using Blockchain, two strangers can conduct business with no need for a third party, while creating a legally-indisputable record of an agreement.

Transactions are more efficient and secure

Each year the financial industry conducts trillions of euros-worth of transactions and Blockchain has the potential to revolutionise how these deals are executed.

Blockchain streamlines and speeds up transactions, facilitating fast and secure payments with less cost, potentially anywhere in the world. The security that Blockchain provides is also a key element in that it renders the tactics used by cybercriminals as obsolete.

JP Morgan, HSBC and Bank of America Merrill Lynch are already exploring Blockchain to facilitate international payments and trade-related transactions but Blockchain can also be used in the real estate sector, for example, to conduct transactions, including the transfer of properties and escrowing of funds.

Smart contracts can deliver powerful changes

Blockchain can also be used to apply ‘smart contracts’, which are still at a nascent stage of development, but which have the potential to deliver powerful changes in a wide range of sectors.

Smart contracts have the terms of agreements written into computer code and this enables the automation of certain functions, such as authorised parties conducting transactions according to the terms. A simple illustration of this is a vending machine, which enables a consumer to buy a bar of chocolate at a fixed price without the need for any third party.

Blockchain can also be used to apply ‘smart contracts’, which are still at a nascent stage of development, but which have the potential to deliver powerful changes in a wide range of sectors.

Smart contracts have tremendous potential. They provide security and consistency and help to reduce transaction costs, not least by reducing the need for ‘middlemen’. At present, they are far from flawless and work still needs to be done to address the grey areas that, in practice, often arise in contracts and transactions. There is much room for refinement, but such contracts do already have clear applications. In real estate, for example, smart contracts can keep track of leases and monitor payments. Going forwards, smart contracts can only become much more commonplace in the financial industry.

Incorruptible long-term data storage

The technology by which computers store information has gone through several cycles over the decades. Data carriers have seen evolution from punch-cards and magnetic tape to floppy and zip discs, to the more familiar CDs, DVDs, hard drives and USBs. While the latter formats are still widely used, they are clunky and perishable.

Drooms is the first virtual data room (VDR) provider to recognise Blockchain’s potential in the transaction space and incorporate it into its product offering. By using this technology, information that was previously archived using DVDs, hard drives and USBs can be authenticated at the click of a button.

Such documentation is invaluable in the legal guarantee phase of a transaction. If there is a legal dispute, then there can be no argument as to who accessed which documents and data and when. Parties cannot argue that they were misled with regards to what they were buying.

Drooms is the first virtual data room (VDR) provider to recognise Blockchain’s potential in the transaction space and incorporate it into its product offering.

Drooms is also storing the data on its servers for a fee for the duration of a warranty period. Whereas DVDs might be lost or corrupted over time, for example, this issue does not exist if a data room is available for reactivation whenever required and all data has been verified and archived according to a unique Blockchain record. All parties with a password will be able to access the data at any time and without the need for notaries.

Ahead of the technology curve

Drooms’ current goal in relation to Blockchain is to provide tamper-proof, cutting-edge and long-term data storage and protection with quick, secure and unrestricted access for all parties involved. We currently offer all modern formats of storage, but we have no doubt that Blockchain will eventually supersede these, not least because it will not fundamentally alter the costs of a VDR initially and over the longer run it will only reduce them.

Going forwards, financial professionals need to consider the power of Blockchain to disrupt their businesses and industries and to pinpoint ways in which they can leverage this ground-breaking technology to their advantage.

Further ahead, we see tremendous potential in applying Blockchain to the incorporation of digital signatures and improving contract analysis. Enabling clients to sign documents within a data room, thereby avoiding third-party involvement and the need to print and sign documents before re-uploading them to the system, boosts efficiency without creating inferior versions of contracts.

Thanks to Blockchain, future data rooms could enable users to read and pull up previously unsearchable contracts that have been signed by specific parties, thereby automating traditional contract management.

Going forwards, financial professionals need to consider the power of Blockchain to disrupt their businesses and industries and to pinpoint ways in which they can leverage this ground-breaking technology to their advantage. Our plan is to help our partners by staying ahead of the technology curve, finding new and innovative ways in which to help them using Blockchain.

Website: https://drooms.com

Headlines have raised fears in recent months that robots threaten many of our livelihoods. However, Jan Hoffmeister from Drooms says that those in the private equity (PE) industry should instead be encouraged by how Artificial Intelligence (AI) technology can give them an edge in a competitive marketplace.

AI technology cannot replace human thinking in relation to strategy and business planning, which are fundamental to PE. But it is an impressive tool when it is correctly incorporated into the more process-driven functions of PE firms, increasing the power to collect, process and distribute information to the right parties with much greater speed and accuracy.

The need to stand out is imperative in the highly competitive PE market. Analysis by EY¹ shows that while the industry has made a strong recovery after the crash of 2008, there is also a lot of ‘dry powder’ sitting in the wings because of intense competition for deals.

Total PE commitments globally stood at US$530.7 billion in 2016, which was close to the US$616.7 billion pledged in 2007. However, in 2017, only US$440 billion of transactions took place versus US$748.4 billion in 2007. In terms of dry powder, there was US$525 billion sitting without investments in 2016.

The key issue is that the right investment targets with appropriate valuations are hard to find. Offering a solution to managing the deal-making process helps a PE firm stand out amid intense competition. Using a virtual data room (VDR), which leverages AI technology, makes a firm best in class, whether it is used for a one-off transaction or to create value in assets over their entire life cycles.

Successful PE firms are thorough in their due diligence, nimble and open-minded to pinpoint the right opportunities and disciplined about formulating the right investment philosophies.

There are two key areas in which a VDR is useful for PE firms, particularly if it is used during the ‘hold’ phase of an asset. The first is consistency, in that documents can be updated regularly, giving the vendor full control over data, sourcing investment targets and achieving correct valuations. The second is responsiveness – documents are always ready, so assets can be bought or sold whenever required.

Given that the intention of PE firms is always to sell an asset, it is especially relevant for them to establish a ‘life cycle’ VDR that can be used to manage a company throughout the period of ownership, from purchase, through management and on to divestment.

A VDR connects authorised users, including those inside a company and their external stakeholders, digitally and in a secure environment with real-time access to all relevant documentation.

A VDR always makes documents relevant to a transaction available to authorised parties and helps ensure that they are up-to-date. All data is stored securely online on a server platform and is always accessible to both internal and external parties, depending on their individual permission levels.

Creating a database in which documents can be updated consistently gives asset owners full control and the ability to react to the latest market conditions, bringing assets to market quickly when the conditions are right, sometimes at short notice.

One of the strengths of the Drooms NXG VDR is its Findings Manager function. This improves the vendor due diligence both prior and during the sales process. It allows for the automatic pre-selection of documents and helps in the assessment of potential risks and opportunities within a transaction. This yields greater control, instills confidence in potential buyers and cuts disruption to existing business.

Those PE firms involved in cross-border deals will find the Drooms transactional room particularly useful. It includes a tool that translates documents in real-time, ensuring risk assessments are maintained in a timely fashion throughout the process.

Essential elements

The integrity of documentation is paramount for PE firms. When deals are going through, unclear, incomplete or erroneous documents can cause all manner of problems, including sales falling through. Documentation must provide an accurate assessment of the value of an asset.

For clarity and transparency, a VDR must also have a stringent and standardised index structure for all assets within a portfolio. All an asset’s documentation should be organised in the same manner, allowing quick access to relevant content for the purposes of comparison. Long-term value can be created in assets if they are encapsulated by standardised and sustainable data – and life cycle data rooms are the optimum tool for this purpose.

The practicalities

In practice, careful planning is essential to manage a life cycle VDR successfully. This starts with getting an accurate snapshot of a project’s current progress using key metrics such as available (and missing) documents.

The time frames, processes and the responsibilities of all relevant parties should be defined, and their commitment secured to the proposed solutions, including any changes to management processes.

All the relevant documents must then be collated and, if necessary, digitised before being uploaded to the VDR. Finally, the VDR must be regularly monitored and maintained, updating and adding documents as required.

Most powerful tool in the box

PE firms that wish to manage a market currently characterised by dry powder, high valuation and enhanced competition need to adopt beneficial technologies. A VDR adds value at all the stages of an asset’s lifecycle, including buying, holding and selling, making the whole process much smoother. The value added in terms of making better deals, improving operational efficiency and enhancing the transparency increasingly demanded by stakeholders makes a VDR one of the most powerful tools at a PE firm’s disposal.

¹Source: EY, Global PE Watch, 2017

The global initial public offering (IPO) market has been a double-edged proposition this year.

Activity levels were down 21% at 660 IPOs globally in the first half of the year versus the same period in 2017, although the volume was 5% higher at US$94.3 billion.*

The reduced activity could be attributed to a backdrop of increasing risks, including trade wars and geopolitical tensions. However, economic fundamentals and equity valuations remain strong, meaning an IPO is still a tantalising prospect.

High profile successes and failures so far in 2018 highlight the potential rewards and risks in the current environment. Major successes this year include the US$3.2 billion Axa Equitable IPO, while the failed Aramco IPO demonstrates the high risks and costs involved.

Companies that wish to go public should consider all the factors that can help maximise the chances of success. In an increasingly digitised world, ignoring the benefits of rapid technological progress, would be a costly mistake.

Technology cannot replace humans in relation to strategic thinking and business planning, which are fundamental to any company. But it is an impressive tool when it is correctly integrated into the more process-driven functions of firms, increasing the power to collect, process and distribute information to the right parties with much greater speed and accuracy.

IPOs are stressful

An IPO is one of the most stressful activities that a company can go through and success is often dependent on a business’s ability to handle high volumes of data in a consistent and timely manner. Companies need to demonstrate transparency and control to all stakeholders, including regulators and potential new shareholders.

In practice, Virtual Data Rooms (VDR) are used exactly for that purpose. Virtual data rooms connect authorised users, including those inside a company and their external stakeholders, digitally and in a secure environment with real-time access to all relevant documentation.

A VDR ensures documents are always available to authorised parties in a secure environment and helps ensure that they are up-to-date. All data is stored online on a cloud platform and is always accessible to both internal and external parties, depending on their individual permission levels.

Creating a database in which documents can be updated consistently gives asset owners full control and the ability to react to the latest market conditions, bringing a company to market quickly when the conditions are right.

Post-IPO benefits

Companies should consider the benefits that a VDR will provide after a successful IPO. It is highly likely that compliance standards will be more stringent for listed companies. Ongoing use of a VDR will aid transparency and speed of response to regulators’ requests for information.

The extra security provided through a VDR is also invaluable and it can be updated as new regulations come through. For example, the European Union’s General Data Protection Regulation came into effect in May with the aim of safeguarding individuals’ personal information. It imposes complicated demands upon companies but these can be met through the use of VDRs, which can be continuously audited and adapted to new requirements and technology as they develop.

Documents create value

The value of having robust documentation for companies going through an IPO is hard to exaggerate. Unclear and/or incomplete data and documents often lead to price reductions and can even cause an entire sale to fall through. It also leaves companies open to regulatory actions if they cannot demonstrate due diligence.

It is crucial that a VDR has in place a stringent and standardised index structure for all assets within a portfolio, which promotes clarity and transparency.

Lifecyle VDRs: 5 elements to success 

Careful planning is required to ensure that a life cycle VDR is structured correctly and that it includes all relevant documentation. There are five elements to implementing this.

First, before starting a project, it is important to get an accurate picture of the situation e.g. how far has a project progressed? How many documents are missing?

Second, time frames, processes and the responsibilities of all relevant parties should be defined.

Third, a project’s success is dependent on the acceptance and participation of various parties, so these should all be included in seeking solutions to the challenges posed by the need to change management processes.

Fourth, documents must be gathered from both internal and external sources and will sometimes need to be digitised before being transferred into a VDR. Detailed reports should be drawn up showing which documents are available and those that are still missing.

Finally, maintaining a life cycle data room is an ongoing process. Documents should be updated regularly, with new documents added as they become available.

Clear advantages

Creating and maintaining a VDR can be a challenge initially, requiring a cultural change and an overhaul of processes for some companies.

But for those companies looking to go public, it would be perilous to ignore the benefits afforded by adopting a VDR such as Drooms NXG, which was the first data room to integrate machine learning technology to streamline workflows. Through increased efficiency, accountability and higher transparency, it can streamline the process to a highly successful IPO, giving senior executives the time to concentrate on strategy and business development - the pursuits that human intelligence still does best.

*Source: EY, Global IPO trends: Q2 2018

Website: https://drooms.com/

The European real estate sector continues to flourish but competition for deals is fierce and speed is often of the essence: so much so that, according to recent Drooms research¹ over 50% of real estate professionals in Europe are compromising on the quality of their due diligence to complete transactions quickly.

However, modern technology has a solution for those seeking to complete real estate deals more efficiently. Where time pressures have led to a potential decrease in the quality of due diligence, parties to a transaction have found a solution in technology enabled with artificial intelligence (AI), such as virtual data rooms.¹

Real Estate is big business

According to a Real Capital Analytics (RCA) report published in February 2018, Europe’s commercial property investment market returned to growth in 2017² as deals of more than €500 million in value accounted for almost one quarter of the year’s acquisition volume. The UK also regained its title as Europe’s largest market after its investment volume increased by 12% thanks to several large transactions such as CC Land’s purchase of the landmark Cheesegrater building for £1.15 billion.

Successful transactions like this depend ultimately on high quality and detailed due diligence but despite the high volumes of information that need to be processed, the real estate sector is still behind the curve in terms of technology and a significant number of important processes are still conducted manually.

The volume of documentation involved in real estate due diligence continues to grow exponentially and it is becoming increasingly important for key stakeholders to quickly and efficiently navigate their way through the mass of information involved and to focus on the key points.

Our survey¹ clearly shows that over the past two years there has been an overall increased focus on due diligence and 73% of real estate professionals believe this focus will increase further over the coming year. For this reason, AI is increasingly being regarded as a solution for today and not technology for the future.

A closer look at the benefits

More than half (54%) of real estate professionals say that they use AI to improve the keyword search process when working on transactions. However, this figure rises to 69% of respondents who say they will be using AI for keyword searches in five years’ time. Other processes that will become more widely used include foreign language translation, identifying red flags, routing documents to the right decision-makers and topic-modelling.

The majority of real estate professionals believe that AI already benefits their firms’ and provides a competitive advantage by enabling a much higher volume and variety of documents to be searched at high speed. Almost the same number say that AI speeds up the due diligence process, while a third believe it improves the accuracy of decision-making. Other benefits of AI include minimising risks and liabilities in an overall deal, reduced reliance on legal services, the ability to automatically create contracts and reports and securing the best deals before other professionals.

The barriers facing AI

Despite these benefits, there are still perceived barriers preventing the uptake and use of AI in the real estate industry. The biggest of these is lack of confidence in AI’s ability to match human intelligence and decision-making (cited by 53%), followed by a lack of skills available to implement relevant AI technology (51%), technology being too difficult to use (41%), a lack of trust by senior management in AI (19%) and concern that AI will replace investment professionals’ roles (17%). Only 9% say the main barrier is a ‘lack of demand’.

What does the future hold?

As a pioneer in the digitisation of due diligence in real estate, Drooms’ technology is helping to change existing processes by integrating AI into its virtual data room (VDR). The aim when building AI into our VDR technology is to enable real estate professionals to reduce the amount of manual review work, eliminate unnecessary errors and reduce reliance on expensive third-party costs. We are just one example of the application of AI, but a very good one.

Crucially, this is not a battle of technology versus humans. Despite its ability to automate a tremendous number of processes, AI will always work best in conjunction with human skills and intelligence. AI needs to learn from human behaviour and there is no substitute for years of experience, instinct and knowledge. However, AI complements those elements and adds huge value by making real estate processes much more automated, efficient and cost-effective.

Website: https://drooms.com/

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¹Source: Drooms, April 2018 - The future of artificial intelligence in real estate transactions April 2018

²Source: Real Capital Analytics February 2018 - 2017 Year in Review edition of Europe Capital Trends.

The rationale behind the regulation

The General Data Protection Regulation (GDPR), referred to by some as ‘the’ biggest change to European privacy laws in the last two decades, is causing commotion across the globe as businesses rush to become compliant by May 2018 or risk facing heavy sanctions.

Finalised in April 2016 the new regulation, which will replace the Data Protection Directive 95/46/EC, has the goal to better protect an individual’s personal data. For clarification purposes that could be any form of information leading to a person’s identification including but not limited to their name, email address, ID number, location data, income and bank details, health information and IP address.

So why a greater focus on the data subject?

Not so dissimilar to the rules of the road, a poignant comparison made by David Lewis, GRC Manager at cyber security specialists Imperva, a person visiting a website should be protected. When browsing online it is expected that our personal information is secure and makes it to its end destination safely too.

Unfortunately, as recounted in the press all too often of late, the risk of a visitor’s data being breached has increased exponentially.

In November of this year, details surrounding a breach suffered by Uber in 2016 surfaced. According to the company, 57 million people have been affected as a result of the cyber-attack. A month prior, detailed card payment information of approximately 60 000 Pizza Hut customers among other user data was thought to have been exposed to hackers. A month prior Deloitte was involved in a cyber-attack for which the real fall out has yet to be defined but is said to have compromised Deloitte's global email server. In July 2017, it became clear that Bupa’s data breach had impacted half a million customers.  In 2016, Android malware compromised over a million Google accounts. In 2013, Yahoo also disclosed a breach affecting up to 3 billion of its email users.

In response to the drop in user trust and confidence which inevitably negatively impacts businesses and the economy, governments are increasing regulatory safeguards.  Unlike the Directive, the GDPR will provide a single set of rules for all companies handling, storing, sharing and processing EU related personal data. Organisations will have to implement new measures to meet the requirements of the regulation and be extremely careful how they acquire, collect, use and store the data of their clients, customers and employees.

The implementation of a single regulation is thought to facilitate business processes in the long run and incentivise organisations to consolidate and streamline data in one place from the offset, where it can quickly be anonymised. The significant reduction in organisational costs, the potential for innovation and the building of greater rapport with customers as well as the decrease in brand and reputational damage associated with avoidable breaches are also argued to be among the benefits of the new regulation.

Cloud services and the GDPR

 The rules of the GDPR apply irrespective of whether data is stored in the cloud or on paper. The former in particular presents several challenges with regards to compliance.

On the one hand, according to Elastica’s Shadow Data Threat Report, as little as one percent of cloud providers’ internal processes are compliant with the new legislation. Less than three percent enforce secure password policies to meet the requirements of the GDPR. This has in part got to do with the Directive’s emphasis on the controller rather than the processor, leaving many a provider unaccountable for the role they play in data privacy and security. Aside from the scenario where direct contractual obligations are enforced on behalf of the controller, processors are not held liable for loss or exposure of information. Where regulation isn’t an issue cloud service providers can limit their focus to ease of use and navigation of their platforms and services.

On the other hand and according to the most recent Netskope Cloud Report, EU firms are unaware of how many cloud applications their organisations are actually using, which on average is believed to be over 600 software programs.

Under the new regulation, the rules will be far more stringent, the threat of fines as high as 20 million EUR or four percent of a companies’ annual revenue (whichever is highest) real, and the sharing of liability binding between both processor and controller. Cloud providers as well as users must enforce a series of technical and organisational procedures to guarantee the level of security required. According to Dr. Rois Ni Thuama, Head of Cyber Governance at OnDMARC the fines are not necessarily the biggest threat to a business’s bank account. The data subject’s right to sue following a breach, whatever the implications, is far more concerning.

“What we are seeing now is a clear division between a growing number of companies that say ‘wait, this GDPR thing is real’, and those who still don’t understand you cannot simply move data around the cloud without addressing data privacy. Privacy regulation is becoming mainstream in IT, in the same way that drug licensing became so for the pharmaceutical industry. It’s either make it clear that you comply, or forget about selling to serious customers,” says Bostjan Makarovic Founder of Aphaia, a GDPR-focused consultancy.

The attitudes of controllers and processors will need to change drastically especially when it comes to negotiating agreements. Strict provisions on the scope of duties of the controller and processor will need to be defined and implemented. Annabel Jones, UK Director at ADP commented: “contractual due diligence will be even more important as businesses seek to partner up with companies that can show data is processed lawfully”. An increase in third party due diligence and a greater focus on insurance policies will most likely also be discernable.

Steps to compliance

When selecting a provider, cloud using organisations need to ensure they choose vendors that are, in the first instance, able to tell their clients where the data they process and store is located. According to the GDRP data transfer to a third party outside the EU that does not have adequate data protection standards is only allowed under certain circumstances. Currently only 11 countries meet such standards.

It is equally important that companies are made aware of any third parties involved in the processing of the data. According to Trustwave’s Global Security Report, approximately 63% of data breaches involve third parties who are often considered a company’s biggest area of risk exposure. As a result they will be the first to be investigated by regulators. If the latter are involved at some stage of the process, measures need to be taken to ensure that they too are compliant.

Security should be a top priority for providers who ought to be able to explain the various measures adopted to protect data from modification, unsanctioned processing or loss. All data centers must be compliant with the latest ISO certifications, the storage and transmission of documents should be carried out exclusively via SSL connection with AES 256-bit encryption. Regular penetration tests should be carried out to assess data security. Two-factor authentication, data deletion, trash retrieval and access controls are just some of the ways data owners can have autonomy on how and whether their data is kept.  

About Drooms:

Drooms, Europe’s leading virtual data room provider, works with 25,000 companies around the world including leading consultancy firms, law firms, global real estate companies and corporations such as Morgan Stanley, JLL, JP Morgan, CBRE, and UBS. Over 10,000 complex transactions amounting to a total of over EUR 300 billion have been handled by the software specialist.

Website: https://drooms.com