NEW YORK--(Randy Shain, founder of BackTrack Reports (nka First Advantage), told a recent gathering of professionals at the CFA Society of Washington, D.C.’s International Due Diligence For Private Equity Investments Forum, that doing due diligence across borders is not easy, and those undertaking this activity need to take special steps to assure their success.)--Conducting due diligence on private equity investments overseas can present substantial challenges, and those interested in doing a thorough search need to research a variety of sources.
“Conducting good due diligence means not skipping steps even if getting certain information may seem difficult or almost impossible”
“Conducting good due diligence means not skipping steps even if getting certain information may seem difficult or almost impossible,” Shain remarked. “Access to some information overseas is more limited than here in the US. But, investors must exercise caution since omitting certain searches leads to not uncovering the seemingly small inconsistencies or events that might make a big difference to an investment decision.”
Shain indicated that such sources of information as court cases can be less revealing overseas since many societies tend to have less litigation than in the U.S. Still, Shain said that thorough due diligence means scouring court records for those suits that do exist and as always, carefully reviewing news services, corporate records and regulatory filings. Overseas, it is also imperative to trace where people may have lived and undertake due diligence in all the countries and regions in which a person has resided. Being able to speak with former colleagues continues to be one of the best ways of getting good information and color on a person’s background and character.
“You are looking for a pattern of behavior,” said Shain. “Exaggerations about educational background, lawsuits, tax liens, jobs omitted from biographies - all can lead to further scrutiny of someone’s credibility.”
As for investors looking at private equity managers, they like to see longevity of staff members, especially focusing on whether any had left a previous fund prior to the end of its life cycle. The functioning of the back office is also an important issue, as the typical investment in a private equity fund lasts 10 years, a lifetime in the investment world.