Investigative Due Diligence Applications for Private Equity Hofstra University Annual Conference Private Equity: A New Force for Value Creation

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Investigative Due Diligence Applications for
Private EquityHofstra University Annual
ConferencePrivate Equity A New Force for Value
Creation
May 2, 2007 John MacKessy Managing Director,
Investigations Forensic Accounting FTI
Consulting, Inc.
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Investigative Due Diligence What is it Why?

• Due Diligence - the process of investigation
  carried on usually by a disinterested third party
  on behalf of a party contemplating a business
  transaction for the purpose of providing
  information with which to evaluate the advantages
  and risks involved
• source Merriam-Webster's Dictionary of Law
• Two Primary Types of Activity
• Mergers, acquisitions, and equity investments
• Business relationships, including joint ventures,
  strategic alliances, supplier / distribution
  agreements, and license / franchise agreements

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• Life is a trap for logicians. It looks just a
  little more mathematical and regular than it is
  its exactitude is obvious, but its inexactitude
  is hidden its wildness lies in wait.

G.K. Chesterton
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Who is performing Investigative Due Diligence

• A 2006 survey of 565 investing executives shows
  that
• 67 conduct background/integrity checks all of
  the time
• 57 have restructured or renegotiated as a result
  of information uncovered
• Smaller firms are less likely than large firms to
  conduct thorough investigations and
• 49 always conduct investigations before entering
  into international business relationships.
• Source Deloitte FAS 2nd Annual Business
  Intelligence Survey

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Four Questions to Ask About Every Deal

• Who are these people, really?
• What am I not being told?
• What does the record show?
• Do all the dots connect?

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Who are these people, really?
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What am I not being told?
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What am I not being told?
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Do all the dots connect?
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• Life is the art of drawing sufficient
  conclusions from insufficient premises.

Samuel Butler
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Investigative Due Diligence When to Conduct

• Consider staging the Investigative Due Diligence
  investigation. This will identify issues to be
  addressed before a commitment to invest financial
  and managerial resources is made.
• The following are the four common stages of
  investigative due diligence
• Data mining of publicly available material
• In-depth and discreet field inquiries
• Review and analysis of Non-Disclosure Agreement
  information
• Detailed report and analysis

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International Due Diligence Special
Considerations

• Standards of Corporate Governance
• Accounting Standards
• Auditor Independence
• Disclosure Practices
• Availability of Public Record Information
• Relations with Government Officials

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Before FCPA
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After FCPA Recent Corruption Cases