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One of the greatest risks to a successful public listing is a lack of adequate disclosure. This is especially true in the People’s Republic of China and other emerging markets where it can be particularly difficult for advisors to acquire reliable information, particularly if they do not have the specialized skills, experience, information networks and other resources needed to support a thorough due diligence process.
Goals of Investigative Due Diligence in the IPO Process |
Due diligence process aspires to achieve the following:
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Assess the reasonableness of information presented in a draft prospectus |
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Identify key vulnerabilities and risks |
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Gain an intimate understanding of the company and the market in which the company operates |
Whilst each IPO is different, Global Insight has observed some common risks that can affect the IPO process and the newly-public company. These risks include:
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Non-disclosure of related party transactions |
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Undisclosed liabilities, especially tax liabilities |
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Undisclosed environmental problems |
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Undisclosed labor disputes |
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Undisclosed previous or current organized crime connections |
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Outstanding obligations, charges, liens |
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Potential conflicts of interest of senior management |
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Actual management differs from that cited in the prospectus of the listing entity |
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Insufficient separation of the accounting functions in inter-group transactions |
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Issues over the intended use of the IPO proceeds, especially in relation to companies with a complicated structure |
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Undeclared or insufficiently described legal issues, civil and/or criminal |
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Inaccurate statements of academic qualifications and technical expertise of senior management |
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Absence of, or problems with, legal title to declared assets |
Global Insight seeks to ensure that a comprehensive and thorough due diligence process generally works in support of the IPO sponsor and/or professional advisors who in many cases have their own research teams that have already raised their own areas of concern in relation to a listing subject.
Our services involve collection and analysis of information from a wide variety of sources generally starting with a comprehensive collection and review of publicly-available material (e.g., online resources, media, public records and corporate filings). Commonly, in cases where our clients have their own research capacity, we work with these teams to review information needs and identify the objectives and scope of our ensuing work.
Areas of particular focus vary widely from case to case depending on the stage of the process at which we are brought in and whether or not particular issues or ‘red flags’ have been identified for further investigation. In general terms, however, key issues in the pre-IPO due diligence work that Global Insight conducts include, but are not limited to:
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Review of the ‘real’ corporate structure and its key officers, shareholders and subsidiaries |
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Background, relevant history and current activities of the company and its principals |
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Litigation history of the company, subsidiaries and principals |
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Character, integrity, reputation, political connections of the owners, principal officers and other key persons |
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Reputation of the company and its principals with its trading partners (vendors, customers, competitors etc) and local regulators |
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Verification of title to scheduled assets |
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Professional and personal relationships of relevance |
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Regulatory risks |
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