Virtual Data Rooms play an important role at each stage of the Deal cycle

Last updated on June 19th, 2023 at 12:56 pm

Virtual data rooms (VDRs) have become the norm in the due diligence stage in most transactions, substituting the traditional paper-based data rooms (see Know-how article “Virtual data rooms: the due diligence evolution”). However, in the last two years, the use of VDRs has changed dramatically: they are now being increasingly used in most of the transaction stages of a deal, not only during the due diligence process.

We believe that this shift in the role of Virtual Data Rooms is driven by the positive experiences that advisers and clients have had with the convenience, simplicity and functionality of VDRs and with their satisfaction and trust in the level of service provided by data room specialists. As a result of this change, in the near future, we believe that VDRs are likely to be called virtual deal rooms rather than virtual data rooms.

There are several trends driving a broader use of VDRs beyond the due diligence stage, in particular:

More complex transactions
Transactions are becoming more complicated and are often changing their nature during the deal process, so they are taking longer to complete. The continuous change in the nature of a deal, with more data being disclosed and timelines being stretched more than ever before, increases the administrative burden and makes the co-ordination of information much more difficult. Using a Virtual Data room as a virtual deal room makes it easier to manage the constant evolution of a deal.

The need for efficiency
In the current economic climate, firms and clients are continuously looking for ways to improve efficiency and save costs. Clients, in particular, want to ensure that legal and corporate finance professionals focus on content and critical process tasks rather than the administration of documents or e-mail traffic. VDR platforms can save a lot of administrative time and work.

Technology familiarization
Users have become accustomed to using VDRs to conduct due diligence and distribute documents online. As they adjust to the convenience of carrying out these processes on their desktops and experience the resulting increased productivity, they tend to become evangelists for using VDRs. Users have now started leveraging the use of virtual data rooms for the circulation of confidential information such as teasers (material produced to generate interest and enquiries), information memoranda, management presentations and board minutes, instead of having to e-mail them to multiple parties.

Increased functionality
VDR providers have, in the last couple of years, introduced a number of features and services that are instrumental in the different stages of a transaction.

Internal document preparation
The preparation of documents for any transaction, such as offer memoranda, business plans and letters of intent, usually requires a significant level of work and exchange of documents. This creates a large administrative workload as multiple parties, such as auditors, legal counsel, investment banks, strategic advisers and the company itself, have to interact in the creation and amendment of the documents.

Building interest
Using a VDR to distribute the deal teaser makes it more feasible to reach out to a larger number of potential investors or buyers and provide them with more detailed information than is possible with traditional emailed documents. On one hand, clients feel comfortable that the information they circulate on the teaser cannot be printed and that access can be revoked at any time, on the other hand, the tracking tools that some of the leading platforms provide allow the client to see which parties have looked at documents and follow up accordingly.

Negotiating and exchanging drafts
Clients are increasingly using VDRs to turn around drafts of deal documents with the other side. The versioning system allows the parties to know which version is the latest, see previous versions and add new versions, including redline and comments. This avoids the confusion and administrative headache of using e-mails to large groups of people.

These are just a few examples of how VDRs are becoming more embedded into the overall transaction flow. It will be very exciting to see what the next few years bring to the VDR industry. We believe that VDRs will become as important during a transaction as spreadsheet or word processing software and e-mail.