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98% of UK PE firms agree that traditional due diligence is inadequate for emerging market investments

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The overwhelming majority of respondents to a new study on private equity in emerging markets report that traditional due diligence methods fall short in emerging markets. Key issues cited in these jurisdictions include difficulties in dealing with the political environment (60%), lack of transparency (56%) and dealing with bureaucracy (52%). Corruption (46%) and local infrastructure (42%) also rank highly on the list.

Despite these particular concerns, respondents often do not flex their due diligence methods appropriately when investing in emerging markets. The majority are taking a more detailed approach to the legal (100%), tax (94%) and financial (92%) elements, while far fewer are intensifying the commercial (34%) and the reputational (41%).

“In emerging and frontier markets, we continue to find that there is a strong overlap between business and government”, says Melvin Glapion, Managing Director Kroll Advisory Solutions. “Government, or representatives of government, are often found as entrepreneurs, shareholders, competitors, regulators, suppliers and market drivers–sometimes disclosed, but often not. This overlap suggests that both the reputational and the commercial due diligence are critical components; moreover their influence upon each other is paramount to understanding the investment thesis. If investors don’t account for this unique challenge when targeting growth markets, they risk overlooking valuable transaction intelligence which can have severe repercussions on the success of their investment, and their reputation.”

The report, published by Kroll Advisory Solutions and mergermarket, polls 50 UK-based private equity investors on their experience in emerging markets to uncover the most common obstacles presented in these jurisdictions.

Due diligence has surely become more stringent since the financial crisis and deals take long to complete, says Giovanni Amodeo, Global Editor in Chief of mergermarket. However, M&A practitioners surveyed by mergermarket believe that in the long run this will have a positive effect, since it is likely to result in more solid firms being acquired.