Emerging markets due diligence ‘inadequate’

UK private equity firms need to modify their due diligence in emerging markets or risk leaving their reputation and investments in ruin, according to on the ground experts.

UK private equity firms are aware their due diligence is unsuitable for emerging markets but do nothing about it, a survey by advisory firm Kroll Advisory Solutions and Mergermarket has found.

The key issues of investing in emerging markets that UK private equity firms highlighted were political environment, lack of transparency, dealing with bureaucracy and corruption. Of the 500 survey respondents, a staggering 98 percent said that traditional due diligence is inadequate for emerging market investments. 

However, less than half respondents are intensifying their reputational due diligence and even fewer their commercial, alongside the traditional legal, tax and financial diligence.

When posed the question: How thorough are your due diligence activities in emerging markets compared to developed markets? Nearly all respondents said their legal, tax, and financial due diligence was “more thorough”. Whereas reputational and commercial due diligence scored 41 percent and 34 percent for “more thorough” respectively.

“If investors don’t account for this unique [due diligence] challenge when targeting growth markets, they risk overlooking valuable transaction intelligence which can have sever repercussions on the success of their investment, and their reputation,” said managing director of Kroll, Melvin Glapion, in a statement.

Glapion added that in these markets there are strong ties between business and government. “This overlap suggests that both the reputational and the commercial due diligence are critical components [in due diligence].”

In a somewhat surprising result the survey also found that only 2 percent of respondents were worried the UK Bribery Act would have implications for fund managers, despite raising corruption as a top concern. 

However, 78 percent of respondents were concerned about the difficulty to implement the Act in emerging markets. And 38 percent feared for potential ramifications on portfolio companies.