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Face-to-face meetings have been an important part of the due diligence process when companies are exploring investment opportunities. But at a time when investors are looking into opportunities but unable to travel as freely as they did before, this process has needed to adapt. Heyrick Bond-Gunning, CEO of global risk consultancy S-RM, explains how the company’s due diligence process has been affected by lockdown, how they have adapted, and what this might mean for the future. 

How do the social distancing requirements and travel restrictions necessitated by the COVID-19 pandemic affect due diligence?

There are various levels of due diligence. These range from public record checks using online databases, to analysis supplemented by physical retrieval of documentation, right the way through to making direct enquires when conducting an in-depth investigation into a particular question or issue.  

Lockdown restrictions have certainly had an impact on some areas of due diligence; for example, the closure of government registries in some countries presented a challenge to accessing certain information. But by using subscription databases, S-RM’s internal database, and leveraging our staff’s expertise in multiple languages for example, it has been possible to carry out rigorous due diligence despite these restrictions. 

Additionally, at the beginning of the lockdown period, the perceived inability to talk to sources in person was a challenge that we had to manage. But as everyone has become more familiar with video conferencing, this too has become easier.

How does the inability – or restricted ability – to look people in the eye or to physically verify information impact transactions and acquisitions?

This is the crunch question. I think Private Equity firms have found this difficult. When you are handing over large sums of money, so much is about the trust, confidence and rapport you build with the other management team. 

We have spoken to several Private Equity firms recently, and it is clear that approaches have been really varied. Some have put transactions on hold because they are used to having six or seven meetings with management, including lunches and dinners, to really get to know them before investing. Others have adapted more quickly by using techniques such as video conferencing.  Two funds in the UK that I have spoken to have each closed two transactions in the past month and are about to close three more. So the picture is varied, with those adapting more quickly stealing a march on the competition. 

Have there been any previous examples of a restriction on due diligence from which companies could draw lessons? Or is this an unprecedented set of circumstances?

These are unprecedented times for societies and businesses across the world. But while there is no contemporary precedent of a global pandemic from which to draw lessons, there are some similarities to the period just before the financial crisis of 2008.  At S-RM we saw that the market prior to the 2008 financial crisis was full of cash, and the restrictions around due diligence were caused by the highly competitive market that investors found themselves in when exploring new opportunities. It meant some investors were cutting corners on the diligence front because they simply didn’t have time to include it in the process. This led to some poor decision-making around certain investments which later came back to haunt them. 

Fast-forward to today and the similarity is that the market is again awash with cash, albeit under highly different circumstances, as governments are offering unprecedented financial aid and support packages to help combat the economic impact of the pandemic. Still, some investors are once again taking advantage of the situation while doing rather light due diligence because there is a belief it isn’t possible to do more, and because of the paucity of investment opportunities and the resultant competitive pressure. 

Wiser investors are still doing rigorous due diligence and adapting by getting the process started earlier so that it doesn’t have a negative impact on deal timelines. Beginning due diligence as early as possible in the deal process has obvious benefits and we expect this trend to continue once more normal circumstances resume.

Have additional, new or different ways of conducting due diligence been required during this lockdown period?

We are getting involved in the deal process earlier, which has additional benefits, especially if something untoward is discovered early in the process. By bringing us in early, the process is made more efficient and has resulted in deal teams being freed up to look at more opportunities. 

Another trend that we were seeing before the COVID-19 pandemic was a move towards increasing levels of cyber risk due diligence; this can be done remotely and so that trend has continued apace, especially as cyber exposures have increased dramatically as a result of the lockdown.

Beyond cyber, there is now also an expectation that more in-depth due diligence includes factors such as reputational exposures. This has become increasingly apparent during the COVID-19 pandemic, which has presented ample opportunities for not only corrupt practices but also unethical behaviour. 

Are these changes to the way due diligence is done here to stay?

We have seen clients adapting extremely well to the situation, reducing the number of face-to-face meetings, having more video conferences and also extending the scope of the due diligence process to include light source enquiries or conversations with the management team. The reality is that working remotely is not an excuse for inactivity.

A great example is a programme of security assurance we are undertaking for a client currently. We are reviewing the security of some 40 sites – remotely. Lockdown conditions have spurred innovation on this front and opened up opportunities for more sustainable business practices when it comes to our security assurance work. Once restrictions on the movement of people are eased, we will likely see our newly developed remote methods continue to complement our onsite security assurance offering. 

While it may have taken some of us a while to get used to video conferencing as a way of holding meetings, now it has become a part of the everyday. Rather than making relationship-building more difficult, we have actually seen video conferencing enhance relationships and break down certain physical barriers that may have existed previously.

There is no doubt that this has been a strange period for many of us, but there are positive lessons to be learned about the way we interact and do business going forward.

 
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