What do you do if you need to solve problems during a Private Equity due diligence process?

Clearly define the problem or challenge you're facing during the due diligence process. Break down complex issues into manageable components to better understand the root cause. Collect relevant data, information, and insights to gain a comprehensive understanding of the problem. This may involve conducting interviews, analyzing financial statements, reviewing legal documents, and performing market research. Evaluate the potential impact of the problem on the investment thesis, financial performance, and risk profile of the target company. Consider the implications for the deal structure, valuation, and negotiation strategy.

Drawing from over two decades in investment banking, effectively managing the due diligence process in private equity is key to uncovering critical insights. The initial step is always to identify potential issues by meticulously reviewing financial statements, legal documents, and operational data. A systematic approach is essential—distinguish minor concerns from potential deal-breakers. It’s vital to document every issue no matter how small, ensuring comprehensive coverage and preventing any oversight. This thorough preparation allows for a clear assessment and informed decision-making, safeguarding your investment interests.

Never shy away from seeking help. You're not expected to know everything! Experts offer deep expertise in relevant industries or technical domains, adding credibility to the due diligence process. It helps evaluate complex issues. Risk mitigation is better as you're able to leverage strategies built on years of experience having seen potential unforeseen risks. Experts also help with assumption validation and projections made during the DD process. Humans have an innate quality to overforecast things. Additionally, you also get access to their networks to access market intelligence and potential deal opportunities. Lastly, experts can identify value-creation opportunities and strategic initiatives that may have been overlooked.

In many instances, enlisting the expertise of professionals aids the private equity (PE) team in effectively communicating identified issues or irregularities to the target company. Experts bring an industry perspective and can establish or validate benchmarks for the target company to consider. Moreover, these experts can furnish a formal, independent fairness opinion in writing, a crucial asset that can safeguard both parties, particularly as the deal progresses towards seeking board approvals.

In my extensive experience in investment banking, involving specialists at critical junctures of the private equity due diligence process has proven invaluable. Once you identify a potential issue, whether it be a legal, financial, or operational discrepancy, promptly engaging with experts in the respective field is crucial. These professionals bring depth, clarity, and precision to the evaluation, often uncovering subtleties that can impact the outcome of a deal. Early expert intervention can prevent costly missteps and provide the confidence needed to move forward in complex transactions, ultimately saving both time and resources.

Impact assessment is critical. Only material issues should be brought to the fore. Sometimes, especially in legal markets like India, sector specific regulatory clearances may be necessary, which may not emanate from the diligence documents. These clearances and the time taken to obtain them need to be flagged upfront.