When GPs are conducting due diligence on target companies in the Middle East and North Africa (MENA), it is imperative to fully understand how the management team works and its corporate governance structure, Mark Kenderdine-Davies, general counsel of the UK’s Development Finance Institution CDC, told delegates at the BVCA MENA Forum on Friday.
Kenderdine-Davies said that CDC is keen to understand exactly how GPs assess target company management teams and what the target’s due processes are. Doing so can shield the GP from certain jurisdictional risks, he said.
He added that he has seen portfolio companies fail due to poor corporate governance that should have been caught during a GP's due diligence.
Without the right due diligence, GPs are at risk of violating anti-corruption laws such as the US Foreign Corrupt Practices Act and the UK’s Bribery Act, said Kroll Advisory’s Melvin Glapion at the forum. In the MENA region particularly, there is a significant degree of corruption risk because of the overlap between the government and private sector.
You need to assess whether or not there is a commitment from the top of the organization
In March, Glapion told PE Manager fund advisors should review the anti-corruption procedures and policies of portfolio companies in corruption-prone industries and geographies.
“You need to interview several members of senior management. Those people will sit down and be asked about the content of the documentation and communications. You need to assess whether or not there is a commitment from the top of the organization. Do they understand what they have written is it a priority within that organization?”
Other regional risks were discussed at the forum. Debevoise & Plimpton corporate partner Geoff Burgess highlighted the legal systems in the region as cause for concern.
“GPs will want to stay out of local courts as they are slow and outside factors can influence the outcome,” said Burgess. He added GPs should ensure they obtain international arbitration if they do get dragged into a dispute.
Kenderdine-Davies agreed but added these conversations are often difficult with target companies.
“It’s a hard conversation to have as you are talking about divorce and you are not even married yet.”