Call in the investigators?

Hundreds of European private equity-backed deals are covered by unquote" every year and, in many of these, full listings of the advisers working on the negotiations are outlined. These include the lawyers, corporate financiers and providers of financial, commercial and strategic due diligence. But there is one group of advisers that is conspicuous by its absence – the business intelligence operators or investigators. This is perhaps ironic in an industry that claims to be people-centric, as it is these agencies that private equity houses might turn to if they require an independent view on individuals' strengths and weaknesses, background and social networks.

However, it is perhaps not surprising that this segment receives less attention than the other key advisers in the private equity world: the due diligence carried out by companies such as GPW Ltd, Control Risks, Kroll and the business intelligence units of large organisations such as Deloitte or KPMG is by its very nature discreet. While in many cases the subjects of the research are made aware that reference checking is to be undertaken, there are as many instances where the research is carried out covertly.

But murky or otherwise, it does appear that this kind of due diligence is becoming a more firmly ingrained feature of the private equity landscape. According to one experienced GP: "Yes we do engage management due diligence specialists and we're doing it more and more. A decade ago, we would probably only use investigators for one in 10 deals. Now it is more like 50%. There are two fundamental things we want to know: are the people totally above board; and are they as committed as they say they are." Of course, as the GP adds, the research does not replace the investor's instinct, it is more aimed at backing that instinct up. After all, as the GP continues: "If we're not pretty sure about a person or a management team, we just walk away."

And the providers of these services are also keen to dispel the image that their main role is to find skeletons in managers' cupboards. "We provide clients with as much reassurance as we do red flags. It's all about putting them in a position to make the right decisions," says Patrick Grayson, senior partner at London-based GPW.

It is also worth noting that the due diligence is not all one-way traffic. With as many as 5,000 GPs competing for dealflow and for a slice of institutional commitments, it is not uncommon for the GPs themselves to be the subject of investigations by specialist business intelligence advisers. So if you ever get the feeling someone is watching you, it may well be the case.

A more detailed look at the business intelligence sector will be published in the upcoming edition of unquote" Private Equity Europe.

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