Commercial due diligence: Under the microscope

John Bakie
11 April 2011

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Following the shocks of the financial crisis, banks are slowly returning to lending. However, given recent experiences they are scrutinising portfolio companies more intently than ever before, changing the role of due diligence. John Bakie investigates

While lending conditions have improved in recent months, as banks begin to leave the difficult days of the recession behind, the landscape today is very different from that seen pre-2008, and obtaining finance is not as simple as it once was.

Today, more than ever before, banks want to know precisely what the financial prospects are for portfolio companies seeking leverage. As a result, the role of commercial due diligence (CDD) providers has changed significantly.

Simon Robbins, director of CDD advisers AMR International, says the financial crisis has made due diligence work significantly more intensive. "We are being asked to do a lot more than we were pre-crisis. You have to be far more granular, and provide a greater amount of forecasting, because that's what clients are demanding," he says.

Today, private equity investors increasingly need hard numbers to convince banks, and even call in CDD advisers pre-exclusivity, to meet demands from their investment committees. Furthermore, banks themselves are seeking firsthand information from due diligence providers. "More and more, the bankers want to see us in person, grilling us about the target company's financial status and our forecasts," adds Robbins.

He also believes a specialist approach, where due diligence providers specialise in a select number of sectors, will become increasingly important, ensuring CDD providers can use specialist industry knowledge to make accurate forecasts and recommendations.

It will be some time before banks are again willing to provide leverage on relatively risky terms, if at all. So those looking to load up companies with debt not only need to know that the firms are financially sound, but also have the kind of business model that will allow them to continue performing. Commercial due diligence has become more important and more challenging than ever before.