Leason Learned #4 - Always Include Grey Hair in Your Due Diligence

Photo credit:  AFP/Getty Images/Thomas Lohnes

Private equity due diligence has become more sophisticated over the past decade.  These days the information package that gets handed to the banking syndicate may include:

1. Market and strategy analysis by a consulting firm to test and validate the commercial thesis behind the investment  (In Australia, active players are LEK, HUB Consulting, BCG, Crescendo)
2. Financial and tax review by an accounting firm (The Big-4, Grant Thornton)
3. Legal review (Freehills, Corrs, Clutz, etc)
4. Insurance analysis  (Aon, WSP)
5. Environmental risk assessment (ERM, SKM Consulting)
6. Management team background checks and capability review by an HR consultant.

When you're paying for all this big city "brain power" it's easy to forget the single most valuable source of business wisdom:  a grey-haired industry veteran. 

McKinsey may do a great job of mapping out the market structure, analysing segment profitability, testing growth assumptions, and so on.  But there's nothing like having a recently retired CEO by your side when you tour the factory, interview customers, or hold question and answer sessions with management. 

He'll be the person who notices that the overhead cranes in the workshop belong in a museum and need to be replaced immediately.  Or warns you that a major supplier has been bought by the competition and will probably cut off distribution.  Or remembers that this particular company always had a problem keeping good sales reps.

Comments

[Peter]

Great point--there's nothing like the insider knowledge of an industry veteran.

I'm interested though... how much emphasis do you put on due diligence? Once the ink dries on the term sheet, what are the chances the deal won't go ahead? Is your DD confirmatory or exploratory?

[GP]

Horses for courses I think.

Confirmatory versus exploratory depends very much on the nature of the investment opportunity. In a structured auction the PE house will be running to short time frames and have limited access to management. DD is happening in parallel and is exploratory as well as confirmatory by necessity.

In a proprietary process hopefully a deep commercial understanding and mgmt relationship has been built well before a term sheet is signed. DD is largely confirmatory.

[TonyB]

IT systems review would also be a pretty common part of any PE due diligence package these days.

TonyB