The truth is out there: enhancing the die diligence process via satellite

An industrial conglomerate is in acquisition mode and looking to purchase mining assets. An investment group is considering whether to make a bet on a much-hyped IPO with production sites in remote places. A consultancy is advising a client on a transaction involving ski slopes.

What these three diverse scenarios have in common is that they all present unusual circumstances for firms wishing to perform due diligence.

Any major transaction involves due diligence, and the larger the transaction, the more important the due diligence becomes. Yet the process is not always straightforward in some cases, particularly when the purchaser wants high quality, up-to-date information on the performance of the underlying assets, perhaps augmented by some historical information. If those assets are in frontier or emerging markets, it becomes all the more cumbersome.

This is where satellite, aerial and drone imagery data can make an enormous difference.

In the past, firms making decisions such as those described above would rely on a combination of market intelligence, sector expertise and circumstantial evidence to build a report as part of the due diligence process.  This would detail various levels of investment risk that may support a case one way or another. But those forms of information can be in some cases subjective and in others incomplete.

The use of imagery as a form of alternative data in these types of situations has made performing due diligence operations not only easier and more efficient, but also more accurate.

Satellite data vendors create time series data on real assets such as mines, which provide a host of indicators about the mine’s performance, both present and most importantly in the past. How much topsoil has been removed, how much waste has been taken away, and critically how much material and of what grade has actually been processed – these are all indicators that satellites can shed light on by capturing images of the location over weeks or months.

An indication of the activity, or lack of it (!) at one location may reveal much about the company’s wider business. In the case of IPOs, where there may be considerable fanfare but little to no track record in terms of documented evidence, imagery, whatever its source, can make the difference between a solid investment and a disastrous decision.

The use of satellite imagery data in particular has become much more common in this respect. But there are opportunities to go further.

Often due diligence is performed by companies who believe a particular scenario in terms of underlying demand for a product or service, typically by reviewing available commercial or economic indicators. Satellite data and other imagery is also processed to provide correlation to these ‘macro’ indicators at a level of detail and accuracy that has been missing in this type of scenario analysis to date.  Currently this is provided purely as a proprietary dataset, but the prospects are good for a new generation of targeted accepted indicators, which will provide hard evidence of economic activity in specific industrial or commercial indicators.  

Let me close with a current example. Imagine a firm is considering investing in or purchasing a high value premium car brand, which has a planned doubling of production over a short time frame in a given country. An image-derived weekly research note measuring the operational and investment risk adds to the research and evidence base to build a convincing case for doing – or not doing – the deal.

At the end of the day, due diligence is all about finding out the truth to accurately calculate investment risk.  In the case of satellite data and imagery, the measurements and the pictures don’t lie.