Private Capital Investing

CHAPTER 4Business Due Diligence

INTRODUCTION

A number of important factors affect and determine the proper functioning and financial success of a corporation. Amongst these are: management risk; financial capitalisation and liquidity risk; project completion risk; technical and operational risk; market risk; financial risk (foreign exchange, interest rate, and commodity price); industry risk; production risk; legal, tax, regulatory, and environmental risk; and many others. Although analysis incorporates a certain degree of subjective judgement, several private equity and private debt fund methodologies converge towards a framework of segmentation of risks: some risks are a result of country conditions, others may be common to all participants in the industry, while yet others are company specific. This chapter is structured into sections that represent phases in the business due diligence process of both private equity and private debt funds.

MACRO FACTORS

A company's business can be strongly impacted by the conduct of the sovereign government of the country where it is located. This impact can be far-reaching. Macro factors are those that influence a company's business environment within the country it is located: government regulations, political and legal elements, infrastructure, financial markets, and macroeconomic environment are among the most relevant. We can classify the main sovereign and country risks as follows:

• Macroeconomic factors: in a broader sense, these ...