As a senior deal lead at a private equity fund manager, a key part of the role is to constantly address headwinds that could derail a transaction.
These challenges could be as follows:
- Diligence findings that challenge your initial hypothesis. For instance, if your strategy involves a roll-up play, you may discover that there's an unexpected scarcity of suitable assets. Perhaps it's the result of increasingly invasive anti-trust regulations or the revelation that available assets are prohibitively expensive.
- Sector-specific risks: Could range from issues such as increasing competition for talent and restrictive union behaviors to cyclicality of the sector and changing appetite of credit institutions to lend to certain sectors.
- Jurisdiction-specific risks: Examples include impending regulatory changes, shifts in licensing requirements, and exchange control restrictions.
- General Liabilities: Then there are outright potential liabilities, such as regulatory fines, lawsuits, or tax issues, which could erode the target company's value.
In a typical M&A deal, there can be hundreds of risks! They can relate to governance, compliance, tax, climate, legal, financial, commercial, and more.
Now, how on Earth do deal teams keep tabs on this dizzying array of risks and the mitigants?
From my discussions with fund managers, it’s clear that there is no universally accepted gold standard for tracking risks and mitigants. Some of it summarized below:
- Delegate to Advisors: Legal advisors maintain an “Issues List” and provide occasional updates on the ever-entertaining horse-trading process.
- Defer to Diligence Reports: Even if they don't capture every detail, latest updates, or mitigation strategy, it’s the best we got!
- Email: Discuss risks internally and externally through email – agree on key points by responding in Bold or color of your choice
- Excel: Diligently going through DD reports, data room documents, and logging risks and mitigants in an excel file. Share this document when prompted!
- Artificial Intelligence: There will soon be a very cool way to query and get summary of key risks and mitigants hidden in inboxes, diligence reports, etc. AI can do it all…
