Due Diligence. Prvate equity funds experience in Russia
Managing Director, ICON Private Equity
When and how does private equity fund make decision on starting due diligence of the target company? How much time can it take from the start of negotiations till the start of due diligence?
Usually a PE fund makes its decision to start full scale due diligence (legal, financial, tax, operational etc.) after it formally agrees deal parameters with the target company and receives preliminary approval from the fund’s investment committee.
Such deal parameters are negotiated based on information provided by the target and/or its advisors, management interviews and internal analysis. Depending on the type of investment process (competitive process or not, public bid or private deal) such analysis may take from several weeks to several months. In case of an open tender with multiple investors invited to look at the target, there may be a strict deadline for submitting bids and starting due diligence. In case of a private deal, due diligence usually starts after the target and/or its shareholders and the fund sign a formal LOI or termsheet. In any case PE fund typically needs a preliminary approval from its investment committee for such a bid or termsheet and this approval, among other things, outlines the budget and scope of due diligence.
In the CIS, start of due diligence is always a sign of relatively final stages of dealmaking as both parties consider it an intimate and costly act. Most investment targets are not that well prepared for a thorough check (i.e. an investor is unlikely to get access to a virtual data room of proper quality, consistent operational data or VDD report), thus due diligence requires intense efforts and lots of field work. There is no sense for a fund to start it unless it is sure the deal is on the table and the only thing left is just to prove numbers previously exchanged between parties.
Managing Partner, Quadro Capital Partners
How often does it happen that the company is not invested by private equity fund after due diligence? What are the reasons?
It is quire rare if the investor spends enough time in understanding the company and partners before the term sheet and due diligence. Doing proper homework in the early stages of the project prevents from that. The deal may fall apart, however if the parties fail to finalize the deal in details; we had similar story with Euroset in 2006 when trying to acquire a minority stake there jointly with advent.
Partner, Mint Capital
Do you use advisors to conduct due diligence? If so how do you choose such advisors and could you provide any names of such companies that you worked with?
Although we do a lot of analysis in-house – especially the business due diligence – we employ advisers in almost every aspect of due diligence. We use second or third tier auditors for financial due diligence. This is sufficient since their staff is usually made up from alumni from the Big 4. And in this case, we don’t need a stamp of approval – just someone who knows the financial and accounting realities of Russian businesses and who can dig deep enough into the target companies’ management accounts to reveal the true state of the company. For legal due diligence we sometimes use local and sometimes international law firms, depending on the existing corporate structure. For deal documentation drafting we always use an international law firm with a strong local presence and team. The deals are practically always structured in English law, and we cannot take any risks here.
Vice President, New Russia Growth
What time does it usually take to conduct due diligence? What factors influence the time of the process?
Conducting due diligence usually takes around 3 to 5 weeks, but this term is subject to many factors including but not limited to the size of the company and its transparence, management’s willingness to disclose all the necessary information and accessibility of this information etc. Also, by due diligence I meant all parts of the whole process i.e. financial, tax, legal and technical/commercial due diligence. Time of the whole process can also be affected, if all of these due diligences start in a different time.
It is necessary to mention one more important factor, that can affect time of the whole process - the professionalism of the advisor, providing due diligence. Professional adviser can deliver good result according to the agreed timeline, otherwise, drafting the reports and answering the questions from the client can significantly increase the overall time of the process.