Investigative Due Diligence Applications for Private Equity

Hofstra University Annual Conference

Private Equity: A New Force for Value CreationMay 2, 2007

John MacKessy

Managing Director, Investigations &

Forensic Accounting

FTI Consulting, Inc.

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

“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

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

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?

Who are these people, really?

What am I not being told?

What am I not being told?

Do all the dots connect?

“Life is the art of drawing sufficient conclusions from insufficient premises.”

Samuel Butler

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:

1. Data mining of publicly available material;

2. In-depth and discreet field inquiries;

3. Review and analysis of Non-Disclosure Agreement information;

4. Detailed report and analysis

International Due Diligence: Special Considerations

• Standards of Corporate Governance

• Accounting Standards

• Auditor Independence

• Disclosure Practices

• Availability of Public Record Information

• Relations with Government Officials

Before FCPA

After FCPA: Recent Corruption Cases