Скачать или смотреть 3 Categories of Risks in Pre IPO Due Diligence

Q: Bill, in your articles you discussed the three categories of risk when conducting pre-IPO due diligence. Could you talk about these categories?

A: Thanks Claris. When we talk about risks here, we're talking about off-balance sheet risks. Broadly speaking, we divide them into three main categories: operational risks, reputational risks and regulatory and sanctions risks.

Looking at the first category, operational risks. These refer to shortcomings in the company's internal processes or operations or key people responsible at the company. Things we look out for may include: other business interests held by the key principals. These may indicate a conflict of interest against the IPO. We ask who are the actual owners and controllers of the IPO company – “Do the key principals have sufficient industry experience to justify their seniority?” We don't just look at the IPO company itself but we need to look at affiliated entities, customers, other stakeholders. Frequently, we see that corporate structures are very complicated. We try to untangle those structures, and we ask why they're so complicated. We also try and look at any other companies that the key principals may be associated with particularly if they have not been divulged as part of the IPO process. We also look for those interrelated party transactions. These may be indicative of such issues as inflation of sales figures and so on.

This leads on to next category: reputational risks. These are risks associated with negative information related to the company's operations, key principals, employees or business parties. This information may be found in the media or through discussions with knowledgeable sources on the ground who have information about the company or its leadership. We also look into documentary information such as corporate records and litigation records. The kind of information that would be pertinent would include:
(1) Has a company or its key principals benefited unethically from their political connections?
(2) Is there any information to suggest that fraud or bribery has ever taken place? Is there any evidence of long-running disputes with rival companies, clients or employees?
(3) For industrial companies, is there any evidence that there have been any environmental issues such as pollution?
If such information is uncovered during the IPO process, it could result in reduced customer confidence, the lowering of the share price and indeed increased scrutiny by regulators.

This leads us to the third category: regulatory and sanctions risks. One of the key goals of pre-IPO due diligence is to establish if the company, affiliated entities or key principals is or has ever been subject of an official investigation as well as the obvious issues of corruption-related investigations, we would also be looking to answer such questions as:
(1) Has the company received any penalties for environmental or labor issues?
(2) Have there ever been any issues in relation to relevant licenses that may be needed for the company to operate?
(3) For example, the mining industry – was the company a former state-owned enterprise? If so, was there any regulatory issues as to the original assets, how they were acquired or valued when it became a private company? Have any of the key principals ever disappeared for questioning by the authorities?
(4) What was the result and reasoning behind this? Has a company had any dealings with entities in sanctioned jurisdictions such as North Korea or Iran?