A Stewards Enquiry for Investment Due Diligence?
On Wednesday 22 May, Neotas hosted a networking evening with clients, peers and partners from across the Investment and M&A world. The evening began with an engaging panel discussion led by guest panellists, Dr. Mike Hicks of Catalysis Advisory, Carrie Osman of Cruxy & Company, and Nicholas Nicolaides of Symvan Capital. Our panellists brought unique viewpoints to the table and it was quickly apparent that parallels can be drawn between investment decisions, deal due diligence, and horse racing! So what’s the consensus on backing the jockey or the horse; or is it a combination of both? And what can we learn about deal due diligence in the digital era?
For Investment and M&A leaders, decisions are informed by insights into the company (“the horse”), including its age, network and form, the past performance and previous wins of the management team (“the jockey”), and the market landscape (“the going”). Over 70% of those in the room last week raised their hand when asked “Do you back the jockey?”, suggesting there’s a welcome shift towards considering the behaviour, network and character of the founders of companies AND the company itself (for example, through traditional commercial and financial due diligence), to inform deal decisions on today’s competitive racetrack.
“Perceptions have been shifting slowly across the private equity investor world so that understanding management isn’t confined just to looking at top team personalities. Instead, managing risk and increasing value is seen to rest on harnessing all available data to inform business decisions, covering top executives, team effectiveness, organisational structures and processes, people capacity and capability in target/investee companies” – Dr. Mike Hicks, Catalysis Advisory
It’s as important as ever for firms to feel they have a tight grip on the due diligence reins, encompassing company networks, directorships, PEPs, sanctions, plus all other data that should be readily available in today’s digital era. Reputational risks and wrongdoings are quick to cross global borders and for investors looking at jurisdictions outside of their home countries, a more informed decision based on ALL available information is paramount.
“The futility of box-ticking in due diligence means you are leaving money on the table. You miss the nuances of each market environment or business model, and fail to see the true value which can be extracted post-investment. Market data and generic interviews only show half of the story – digging deep into the ‘why’ can find the hidden weapon that will get that market to pay double and maximise your return.” Carrie Osman, CEO & Founder, Cruxy & Company
As we shared last week, there is a vast amount of untapped intelligence available across social media, deep and dark web, that can provide a valuable piece that completes the due diligence jigsaw. Management due diligence that harnesses publicly available sources online will identify reputational risks or concerns, provide deeper insights into the jockey (including network, behaviour and performance) and according to Nicholas Nicolaides, help to pinpoint the “unknown unknowns”…
“Management due diligence remains the weakest link in VC and PE deal assessment and completion processes. Beyond the usual checks, evaluating how the team can perform under pressure is far removed from evaluating how, for example, a tech stack will perform when exposed to high-write traffic. The approach to evaluation of management is changing and shifting away from over-reliance on box-ticking. We need to consider so much more in our processes and look for the unknown unknowns.” Nicholas Nicolaides, Investment Manager, Symvan Capital
There are of course a lot of unknowns in today’s climate, including the current political landscape in the UK. With a surge in technology driven start-ups disrupting various sectors, investors are turning their attention to the hubs that are home to these firms across the globe. In doing so, there is an inherent need for the right due diligence services to be available that take into consideration the jurisdictions in which these firms operate and a deeper understanding of the market environment.
Perceptions are definitely shifting with regards to investment due diligence and more specifically, management due diligence that delves deeper into the people behind the business. Is it a stewards enquiry? We don’t think so, as in today’s world, to make informed deal decisions, confidence in both the horse AND the jockey needs to be a by-product of the due diligence process. Gut feeling is still a factor, but why not reinforce and verify those decisions with deeper due diligence that is built for the investors of today?
With thanks to our attendees and guest panellists who joined us on Wednesday 22 May!
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