A due diligence process for a private equity transaction involves a complete background check of a target\/investee company. This exercise is conducted to locate the target\u2019s assets and liabilities and identify any operation-related issues. It is important to know these aspects as they impact investment returns. According to the 2022 Global Private Equity Outlook, upcoming opportunities in the industry indicate a bright future for private equity funding. In 2022, the industry is expected to break previous records, surpassing USD1.2tn in value. <\/p>\n\n\n\n
Due diligence conducted by private equity firms is extensive, allowing firms to ascertain the implications of potential investments. It requires significant regulatory and financial insight and involves the mapping of market trends for a successful investment. Given that due diligence can be highly unpredictable, private equity firms need to be as thorough as possible in the given time.<\/p>\n\n\n\n
Below, we look at five types of due diligence that private equity firms conduct:<\/strong><\/p>\n\n\n\n Commercial due diligence involves evaluating a target company\u2019s commercial activities to estimate its growth potential. It is the process of understanding how the company operates in an industry. The investor conducting due diligence must request all pertinent documents from the target company. These should provide complete details on the nature of the company\u2019s business, its subsidiaries, current products\/services, and expected expansions or pipeline projects. Some of the areas to focus on include<\/p>\n\n\n\n Evaluating the role of a company\u2019s management in its business is crucial. This would involve taking every chance to engage with the management team to understand them well. The due diligence should be thorough, conducted with the help of private equity consulting. At this stage, personal interaction and Q&A sessions are included to perform background checks. <\/p>\n\n\n\n Financial due diligence refers to determining the financial performance of the business at the level it has been presented. It is focussed on the detailed evaluation of financial information through the analysis of disclosure schedules, minutes, trial balances, bank statements and audit reports. All accounts and their financial indicators and audit reports are compared against the industry standard and analysed appropriately. Metrics such as historical margins, debt, equity and leverage are analysed to determine the sustainability of the revenue and cash flow of the target company.<\/p>\n\n\n\n Legal due diligence is primarily confirmatory due diligence conducted by probing into the legal affairs of the target business. Here, PE firms should be confident about material findings to arrive at a valuation. It is necessary to determine the company\u2019s unknown or potential liabilities. This due diligence also includes looking into the company\u2019s compliance with laws and regulatory frameworks.<\/p>\n\n\n\n It covers the evaluation of<\/strong><\/p>\n\n\n\n Owing to varying levels of tech sophistication in different businesses, applying a standardised process to determine their dependency on or utilisation of technology is challenging. Their systems that are supported by IT infrastructure can be evaluated for current capacity, capability to scale and security. <\/p>\n\n\n\n Significant areas of focus for technology components include:<\/strong><\/p>\n\n\n\n Major documents include memorandum of association, articles of association, public releases of the last three years, material contacts, MCA records, filings with RoC, statutory records, list of creditors, HR-related documents and licenses\/approvals.<\/p>\n\n\n\nCommercial due diligence<\/strong><\/h2>\n\n\n\n
Management due diligence<\/strong><\/h2>\n\n\n\n
Financial due diligence<\/strong><\/h2>\n\n\n\n
Legal due diligence<\/strong><\/h2>\n\n\n\n
Technology and IT due diligence<\/strong><\/h2>\n\n\n\n