Philippe Jabre is the founder of Jabre Capital Partners, an independent wealth management company and multi-family office that he continues to serve as CIO and CEO. Established in 2006 in Geneva, Switzerland, the company has gained recognition as the proud recipient of various industry awards, with over $6 billion in assets under management at its peak. This article will look at due diligence from the perspective of a private equity firm, examining the crucial role of due diligence in assessing risk and validating investment assumptions.
A vital step in any private equity transaction, due diligence is a deep-dive investigation spanning various aspects of the target company, including everything from legal compliance and financial performance to operational health and commercial viability. Essentially, it covers every aspect that could make or break the deal.
For private equity funds, there are various parameters to assess and common red flags to look out for. In an increasingly constricting credit market, at a moment of historically heightened competitiveness in the private equity market, generating strong investment returns is more challenging than ever before. Appropriate due diligence provides an exhaustive understanding of the company, evaluating factors such as customer relationships, market strength and financial performance, positioning the private equity firm to close the deal at a favourable transaction price.
Financial due diligence requires a thorough review of the business’s financial statements, including income statements, cashflow and balance sheets. The objective is to validate reported figures, identify inconsistences and gain a clearer understanding of business performance. Analysts assess historical financial results, adjusting EBITDA to reflect normalised earnings. They also evaluate working capital needs and stress-test financial projections to help them determine the reliability of future cash flow. In addition, it is crucial to review internal controls and accounting policies to gauge financial governance of the company. With some business structures, use of a subscription line of credit in private equity could temporarily impact liquidity. Its role must therefore be clearly understood during the review.
Legal due diligence looks at the current and future liabilities of a company, with analysts examining corporate filings, antitrust and regulatory issues, compliance with regulations and statutes, and environmental issues. They will also investigate insurance coverage, permits and licences, articles of incorporation and annual reports, as well as bylaws and amendments, listing of shareholders and percentages owned, and the location of the company’s headquarters.
Operational due diligence explores aspects of the day-to-day mechanics of a business to determine whether it is sustainable in the long term and capable of supporting post-investment growth. This includes assessing operational efficiency and supply chain stability. The private equity firm will also look at the technology infrastructure and cybersecurity protocols of the business, as well as evaluating the organisation structure to identify whether key personnel have the capacity to execute the business plan effectively. In terms of human resources, analysts will look at the management team, current employees, employment contracts and salary schedules, as well as examining third party contractors, consultants and other service providers and outsourced professionals.
Other aspects of due diligence include commercial due diligence, which analyses competitors, industry dynamics and customer segments to determine a company’s position. Tax and accounting due diligence involves reviews of historical tax filings and outstanding liabilities in order to identify risk. An increasingly important consideration is environmental, social and governance due diligence, assessing the environmental compliance and sustainability initiatives of the company to ensure it operates in a socially responsible way. Technology and intellectual property reviews and risk assessments are an integral part of the due diligence process, highlighting any potential red flags that could slow down or even stop the deal.
