The due diligence process that the GP conducts prior to investing in a portfolio company is critical. The information obtained during the process, together with GP's own knowledge and expertise, forms the basis for any investment decision.
The due diligence process examines a broad range of aspects of the target company's business, including commercial, market, financial, tax, legal, regulatory, pension, insurance, information technology, intellectual property, environmental, social, governance and management capabilities. The objective is to gain a detailed understanding of the target company's prospects and assess the risks and issues it faces or may face in the future that could play a role in GP's investment decision, as well as the ultimate success of the portfolio company over the planned investment period. From this, an assessment of the potential for the fund to create value and ultimately exit the investment is derived.
In certain circumstances, a GP may face time constraints in making an investment. These may arise from the specific bidding environment of the transaction or the condition of the portfolio company in the case of a turnaround or distressed investment. In these circumstances, planning and prioritization is required to ensure that the GP has a proper understanding of the opportunity in order to make its decision.
GP should obtain sufficient information to properly evaluate the proposed investment opportunity and determine the value of the target company.
The information obtained should (within the limits of what is practicable in the circumstances) take into account all reasonable aspects (which may include the financial position of the target company, the experience and capabilities of its management team, the industry(ies). This may include the financial position of the target company, the experience and capabilities of its management team, the industry(ies) and geographic location(s) in which the target company operates, the potential to exploit technologies or research being developed by the target company, the potential scientific proof of an important concept, the protection of important intellectual property rights, pension obligations, relevant ESG factors, litigation risks and insurance coverage.
The due diligence process should also include a review of the assumptions on which the business plans are based and an objective assessment of the risks that may arise from an investment and the potential return.
Other appropriate checks as required by LPs, regulators and other stakeholders should be carried out. This should include taking steps to ascertain that the transaction does not contribute to money laundering and to ensure that the investment complies with anti-corruption and anti-bribery rules and relevant sanctions regimes.