Virtual Data Rooms: the unsung hero of Investment Banking & Corporate Finance
Introduction:
Even though the history of investment banking and corporate finance goes back well before the 16th century, digitization, which began in earnest in the late 1960s, has rapidly transformed these industries. While post-war financial professionals would have to carry out all their work on paper, from the 1960s, they began to increasingly take help from technological and digital aids to speed up their work and simultaneously improve the quality of that work.
Digitization has revolutionized the investment banking industry, completely changing business operations. With the advent of advanced technology, investment banking has become more efficient, faster, and more accessible than ever before. The use of digital platforms and tools has transformed the investment landscape, allowing investors to access information, analyze data, and make decisions with greater ease and accuracy.
Today, the financial industry is knocking on the doors of a fourth wave of financial technology. In a broader context, this wave of financial technology is coming as the global manufacturing industry also braces for a more comprehensive fourth industrial revolution.
While the financial industry’s representatives, leaders, and talking heads are all focused (and rightly so) on how approaches and technologies such as Artificial Intelligence (AI), Natural Language Processing (NLP), Unstructured Data collection, etc. are bound to revolutionize investment banking, this article hopes to shed light on an “unsung hero” of the industry, which has not only energized and speeded up work in the industry today while providing data security, but promises to be an engine of adoption of new technologies tomorrow.
The “unsung hero” is the Virtual Data Room or VDR. These allow users to communicate secret information electronically. They also allow for comprehensive access control over a project. They are the framework which allow for dispersed teams. This is essential as this allows investment banking teams to collaborate while individual members can position themselves closer to customers and provide them with better service. But most importantly, in the future, VDRs will provide a framework for integrating the technologies listed previously.
What are Virtual Data Rooms, or VDRs?
In corporate operations such as mergers and acquisitions, fundraising, and due diligence, a virtual data room (VDR) is a secure online repository for storing and sharing sensitive information. The VDR provides authorized parties with controlled access to important documents and information while maintaining strict security protocols to protect against unauthorized access, theft, or data breaches. This allows multiple parties to collaborate on a project remotely while ensuring that sensitive information remains confidential and protected. “Virtual Deal Rooms,” “Data rooms,” and “Private Virtual Rooms” are synonymous with VDRs.
Physical data rooms, once used to reveal and share records, are gradually being supplanted by virtual data rooms. Virtual data rooms are a desirable substitute for physical data rooms in light of company globalisation and rising pressure to cut expenses. Virtual data rooms are more secure, instantly available, and more broadly accessible.
VDR companies are creating increasingly complex and dependable databases as security worries and breach occurrences rise. Virtual data rooms are used by initial public offerings (IPOs), auditing operations, partnerships, and other enterprises that must collaborate and share information.
What are VDRs used for?
VDRs improve businesses’ due diligence procedures and lessen the amount of actual paper work required, which lowers overhead, clutter, and waste. Having stated that, a VDR can be used whenever a business needs to give secret information to other parties. In order to effectively convey the message of its owners to the third party, this data must be appropriately formatted. It must be adaptable such that requests and remarks made by the third party during data analysis can be automatically forwarded to the owner. It must be secure, preserving its integrity.
Therefore, some of the most frequent uses of VDRs are: -
a) Safe storage of valuable private data
b) Safe sharing of data between internal and external stakeholders
c) Tracking of project management (based on document sharing and updates)
d) Tracking shares, edits, and requests for individual documents
e) Providing a general overview of access hierarchies to documents and folders
f) With the rise of remote working and globally dispersed teams, VDRs allow team members to work outside the office securely.
Examples of uses-cases of VDRs in Investment Banking and Corporate Finance
VDRs are an excellent platform for secure, controlled and seamless cross-geography collaboration. With Investment Banks and Corporate Finance Teams operating across the globe 24x7 today, VDRs have several applications, all of which allow for faster, smoother, and higher quality operation. They also actively assist professionals, allowing them to invest more time towards innovation and cognitive activities. Some of these use-cases are: -
Mergers & Acquisitions (M&A): — In an M&A process, banks represent several organisations. The setup of the necessary papers in a data room for convenient access by potential buyers is typically required for sell-side M&A. Within a set time frame, the room enables prospective purchasers to see key documents as part of their due diligence procedure. The buy-side M&A industry values data room banking because it enables them to conduct the necessary due diligence to assess if the transaction is a wise investment. A data room enables the representative team to assess the documents included therein, do analysis, and ascertain the M&A’s financial viability.
IPOs: — The data room enables all key parties to have access to the crucial papers needed for an IPO. Investment bankers, lawyers, and other individuals who sign documents are some of these parties.
Fund-raising: — Data rooms are useful for debt and equity fundraising deals because they make it easier for potential investors to review crucial paperwork. They can use data rooms to calculate debt levels, comprehend prospective equity, and decide whether an enterprise is worth the risk.
Future of VDR: Where the technology is headed?
VDRs are more than likely to continue being operational in organizations across the corporate world, not just for Investment Banking and Corporate Finance. That’s because in all its use-cases, VDRs provide a secure platform for authorized parties to access and share confidential information, while maintaining strict security protocols to protect against unauthorized access or data breaches. This allows professionals such as investment bankers and corporate finance practitioners to collaborate more efficiently and effectively with their clients and other parties involved in a transaction.
To this end, it is predicted that by 2026, the global VDR market will be worth USD 3.63 Billion. This figure may be touched sooner than predicted as in-fact, going forward, VDRs will also act as an aggregator for companies to introduce more automation and technological advancements in their work. VDRs can be used in the future in the following ways: -
Increasing adoption: — As more companies recognize the benefits of using VDRs for managing sensitive financial information, experts believe that adoption will continue to grow, owing to network effects. VDRs are expected to become more user-friendly and accessible to a wider range of users.
Improved security: With cybersecurity threats increasing in sophistication, experts predict that VDRs will continue to evolve to provide better security features, such as encryption, two-factor authentication, and digital watermarking to prevent unauthorized access.
Cloud-based VDRs: As more companies move their data to the cloud, experts predict that VDRs will become cloud-based as well. This would provide greater scalability and flexibility, as well as easier access from anywhere in the world.
Status as a service aggregator: — This is where I believe VDRs hold the most value. Professionals today demand that multiple Fintech 4.0 be available at their disposal. VDRs allow for service providers to integrate them and provide the technologies as a package in one go.
VDRs, although have made the work and lives of numerous financial professionals easy, have been pushed to the backburner of the debate vis-à-vis workplace digitization and security. However, I believe that more concerted efforts to improve existing VDRs and to speed up integration of Fintech 4.0 tools needs to occur to benefit the industry, employees and customers with an increased service-quality.
Investment Banks such as J.P. Morgan, Morgan Stanley, & Bank of America have all adopted VDRs to speed up their processes and allow for their teams to be flexible. Besides, both multinational companies (such as P&G and Chevron) and startups use VDRs to efficiently carry out corporate financial activities.
Although it must be added, there should never any guaranteed declaration that any piece of technology is the future in that field. Even today, organizations such as Central Banks & other government agencies refuse to use VDRs due to the perception that an airgap is the best method to secure critical data. They also believe that the costs of not keeping a VDR far outweigh the potential costs of damaging system breaches. Also, with the dizzying innovations being carried out, a replacement of VDRs is not an impossibility.
Sources:
Fintech: Digitizing the Financial Industry (topcoder.com)
What Is the Fourth Industrial Revolution? | Salesforce
FinTech — the ‘new normal in finance | The Star
Trends in Investment Banking Technology (4degrees.ai)
Recent Trends in Investment Banking Technology | Geniusee
What is a Data Room: VDRs Explained with Examples (dealroom.net)
Artificial Intelligence and Virtual Data Rooms | LinkedIn
The future of VDRs and How They Are Used in Businesses Today | Divine
VDR and Its Eye-Catching Benefits | CEOViews
