Manufacturing due diligence expertise is supported by our dedicated manufacturing team whose expertise has developed working on high pr<strong>of</strong>ile strategy <strong>and</strong> operational engagements for major international blue-chip manufacturers. We also back our own market insights via the PA <strong>Venture</strong>s programme, as evidenced by the successful spin-<strong>of</strong>f <strong>of</strong> Ubinetics, the innovative 3G equipment supplier. Recent examples <strong>of</strong> where PA has applied this specialised knowledge in strategic due diligence assignments include: A major European private equity deal where PA Consulting Group worked with an equity sponsor on the due diligence <strong>of</strong> a specialist manufacturer <strong>of</strong> chemicals. By mapping the underlying manufacturing technology to the changes in dem<strong>and</strong>s for various polymer <strong>and</strong> substitute products, PA were able to greatly enhance the financial sponsors’ view <strong>of</strong> the key capital investment priorities. For a 2006 deal, involving a major European PE house, PA Consulting Group were able to apply a strategic due diligence team <strong>of</strong> manufacturing specialists to evaluate the real competitive advantage <strong>of</strong> the core technologies, identifying potential market applications, <strong>and</strong> uncovering specific high risk areas such as product warranty, all issues that materially impacted on the deal value. A best practice approach to strategic due diligence These cases illustrate how strategic due diligence, based on an ability to add value well beyond a cursory market examination, has yielded significant deal value to our clients. As the private equity mid-market becomes more competitive expect to see more financial sponsors investing in true strategic due diligence. Management due diligence Appraisal <strong>of</strong> the management team is a core part <strong>of</strong> the private equity firm’s responsibilities <strong>and</strong>, naturally, starts from the very first meeting. It also continues through the life <strong>of</strong> the investment, as considered in Module 8, as the investor constantly updates <strong>and</strong> refreshes her view <strong>of</strong> the team. Despite this, management due diligence will also be undertaken as a separate, formal exercise designed to reinforce – or question – the investor’s views. The process will examine three principal areas: • the track record, performance, competence <strong>and</strong> integrity <strong>of</strong> each senior executive on an individual basis; • the structure, efficiency, compatibility <strong>and</strong> effectiveness <strong>of</strong> the senior management team as a unit; <strong>and</strong> • the extent to which each individual’s motivation <strong>and</strong> personal objectives are aligned with the focus on value growth <strong>and</strong> realisation inherent in any private equity financing. Looking to the future Although there is, by necessity, a heavy degree <strong>of</strong> reliance on past performance in appraising the management team, it is also essential to project this appraisal into an assessment <strong>of</strong> suitability for the dem<strong>and</strong>s <strong>of</strong> running an independent, private equity backed company. This requires a clear underst<strong>and</strong>ing <strong>of</strong> roles, responsibilities <strong>and</strong> success criteria post-investment. Two examples <strong>of</strong> failures in this area will help reinforce the message. The first concerned the buy-in/buyout <strong>of</strong> a company making injection moulded plastic components for a highly specialist sub sector. The company was purchased from its founder who had also been the CEO <strong>and</strong> retired from business after the sale. A new incoming chief executive, who <strong>of</strong>fered particularly strong sales <strong>and</strong> marketing credentials, combined with the incumbent production director to form the nucleus <strong>of</strong> the new management team. Unfortunately the due diligence process failed to identify that the highly complex, custom developed application <strong>of</strong> injection moulding machinery, which gave the company its competitive edge, COPYING WITHOUT PERMISSION IS UNLAWFUL THE FUNDAMENTALS OF PRIVATE EQUITY 17
Module 8: Aftercare <strong>and</strong> exits COPYING WITHOUT PERMISSION IS UNLAWFUL THE FUNDAMENTALS OF PRIVATE EQUITY
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