Investing in privately held companies is inherently risky, but done well it is also a rewarding exercise.
It is common knowledge that once a suitable investment candidates are found, conducting due diligence will boost returns on average. It is suggested that due diligence can boost returns by 40% over a private company investment portfolio. But traditional due diligence has its shortcomings – being driven by lawyers and accountants traditional due diligence is squarely focused on risk. Risk mitigation is crucial to reducing investment losses, but it is only half the story.
The key to boosting private company investment returns is in the opportunities for the business. So any due diligence conducted should focus as much on the opportunities as the risks. This is done be redefining the DD to be Commercial Due Diligence.
Commercial Due Diligence goes beyond financial analysis to understanding all relevant commercial elements of an organisation and providing a 360° view of the organisation and its prospects.
The commercial due diligence you undertake should be done by someone who is independent in order to avoid selection bias. The due diligence should also be performed by persons other than just traditional lawyers and accountants (although they might be bought in to the process), persons with a commercial background who understand the front end of the business, how it can capitalise on opportunities, and the operational challenges it will face.
Some of the things a commercial due diligence will evaluate that perhaps some traditional due diligence must not cover, are such things as forming an opinion about the market the investee business operates in, where its strengths lie, what are the keys to its success, what its exit opportunities are, and whether the forecasts are real financial projections or just an ‘expression of hope’. It looks at whether its business model stacks up, what its impediments to growth are and how it might overcome these, what its short and long term opportunities are, and whether there have been any recent shareholder disputes.
Fortunately Intellix can help in this regard. If you are considering an investment in a private company, give us a call to discuss how Intellix can help boost your investment returns and meet your value creation and risk mitigation goals.
This article is based on research and opinion available in the public domain.