We are fortunate that, over time, we have developed excellent relationships with the Private Equity and Venture Capital community, and we are frequently asked to perform diligence exercises on behalf of investors. We bring to these projects not only our analytical and investigative skills, but also our understanding of the job the management team is trying to do to grow and develop the business. This means we are able to provide a view which is far more rounded than one based solely on an audit of the Company’s financials.
An excellent example of this is a case where we were engaged by a venture capital house to perform a diligence exercise on a potential syndicated biotechnology investment of c£35m. The financial forecasts produced by the management team appeared sensible, and would have provided the investor with an attractive return should matters have proceeded as intended. An additional aspect of our work included a review of staff leavers and the circumstances behind each departure. During this review we found that one employee had been sacked, and further investigation revealed that this was because they had been faking test results. We expressed to our client our significant concern and suspicion that such falsification of results might be occurring elsewhere in the organization.
Following up this point uncovered a situation where the falsification of test results was indeed more widespread. In fact the whole basis for the proposed investment was flawed, and the business had no chance of achieving the sales and growth forecast. Needless to say, the investment did not proceed, and the investors saved the £35m which they were intending to invest.
While in some ways this is a straightforward example, there are a number of key lessons to be learned:
- There is more to diligence than following a set of codified processes – intuition is always essential
- In this light, it is clear that commercial experience is vital. The long-term reputational damage caused by an ill-judged investment of this sort is far greater than simply the short-term cash loss, however large that might be
- Where one instance of wrong doing is present in an organization, it is often evidence of cultural problems and more widespread failings
- A diligence project should be far more than simply a financial review or audit. To treat it as such risks missing vital indicators of the company’s health and prospects.
If you have a potential investment or project which you would like us to review on your behalf, please call us on 0141 243 4980.