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GLOBAL-WIDE: An Introduction to Business Intelligence & Investigations: Pre-Transactional Advisory (Investigative Due Diligence)

Michael Bevan
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The global M&A landscape has evolved. How have investigation firms responded?

A wall of liquidity has driven competition for a diminishing pool of quality assets. Valuations have gone up, transaction timeframes come down, and the penalties for structuring the wrong deal grown more acute. As the risks have evolved, so has investigative diligence. This article looks at some of the ways in which sophisticated investigation firms have responded to the new challenges.

One long-term trend is the demise of the traditional mainstay of the industry: the open-source investigation. This legacy product – scraping information from the public domain, mostly as a backward-looking, box-ticking exercise – has been on the wane for years and is now largely redundant as a meaningful exercise in investigative due diligence. While it is often a cheap option and is favoured by some sections of the investigation industry as an easily delivered and scalable product, the findings are often little more than a deal team’s analyst can provide through a few hours of online research. With the volume of misinformation in the public domain and the growth of artificial intelligence platforms that can automate much of the work – never mind the sheer scale of material that is now out there – it’s clear that the usefulness of this kind of research for exploring the nuances of a potential transaction is limited.

As open-source research has become more commoditised and compliance-focused, dealmakers are turning to firms that can deploy a source network. These networks – formed of contacts on the ground with trusted access to the target – can cut through the online noise and offer dealmakers a vital competitive edge. Scoping can range from identifying the real decision-maker in a close-knit family that is selling their business, through to intelligence around the rival bidder universe. The latter especially, once the preserve of the clubroom and the ‘old boy’ network, is moving to the discreet investigator, whose deep international and sectoral networks can provide multi-angled insights and understanding.

Investigation firms have also been moving towards providing more commercially-relevant intelligence on a deal. The core investigative offering to deal teams has traditionally been – and for many firms remains – defensive: investigators are asked for insight into the reputation and integrity of the target management team and business, with the main consumers of the resulting product typically being compliance departments. However, the demands from private equity and corporate/M&A dealmakers are broadening. A deal team modelling a target company may need to understand the accuracy of an order book puffed up ahead of a sale, for example, or a potential change in government policy in a strategic sector that may impact an investee company’s ability to sell to China. The ability of an intelligence firm to discreetly source such sensitive information helps to remove uncertainty around a business model. More importantly, an information advantage may also give a buyer confidence to lean a little more aggressively into a valuation, which ultimately may enable it to win the asset.

A further trend has been the shift by dealmakers into emerging markets to chase growth as well as maintain returns as competition for assets closer to home intensifies. This shift is further driving demand for investigation firms who can provide intelligence in markets where clients have no track record or established network of their own. In addition, the increased competition for assets is shrinking the timeline for providing intelligence on targets. Dealmakers now looking to “pre-empt the pre-empt” are making the historic five-to-six-week timeline to provide an investigation report look leisurely in the face of demands now to execute in 10 to 15 days. Investment committees and company boards, themselves under pressure to ensure deals are in line with the heightened ESG and other governance standards of their pension fund limited partners or public market shareholders, cannot rely on high-level, light-touch reports in most markets. However, when the markets are new, or the deal has been cobbled together in short order, they are vital.

The investigation industry has been resilient in most market conditions, and the Covid-19 pandemic is no exception when it comes to deal-related intelligence. With the opportunities for travel limited, deal teams have struggled to physically meet target management teams. Other intelligence that a deal team would historically rely on has also been constrained: M&A advisers, lawyers and consultants previously sitting in target companies’ offices and working their own networks traditionally provided informal information feeds that were critical in packaging a deal. Investigators, with their network of local contacts, have been actively filling these information gaps. With the confidence teams now have around making deals remotely, investigation firms can prove a long-term solution for the executive who sees the value in using independent personal insights from trusted, reliable third parties. As they continue to adapt to the demands of the investment industry, investigation firms should remain a feature of deals for years to come.