Private Equity: International Risks & the Role of Technology

Private equity is booming. An all-time high of 2,296 private equity funds were active as of January 2018, seeking to raise an aggregate $744bn, representing a 25% increase compared with a year earlier(1).Parallel to this growth however has been an increase in the regulatory burden that firms are exposed to. From the EU’s 4th Anti-Money Laundering Directive to Sapin II, the shift is international – and has put greater responsibility on funds to understand different regulators’ expectations and conduct the right level of due diligence on their investment targets.One could be forgiven for thinking that compliance and legal officers at private equity firms, who are often in single-person teams, are being asked to do more with less.In this environment, senior compliance and legal officers from leading private equity firms attended a recent roundtable dinner hosted by Exiger and shared their perspectives on 3 key trends influencing their compliance efforts.1) Investment teams: getting the word outThe business relies on you to guard the organisation. So how can you strike up the right relationship with your investment teams – ensuring they’re up-to-speed on the risks and demonstrating the right behaviours?Key perspectives shared included:Compliance as a value-creator Failures in compliance can negatively affect the value of an investment – a language that investment teams are certainly familiar with. Framing compliance or legal as central to protecting the valuation of a company can aid a change in perception.Case studies Where an organisation has demonstrated best practice or had its fingers burnt in the past, playing case studies back to the business can be an effective tool. This is particularly so when the person presenting the case study comes from an investment team.2) Portfolio companies: ongoing risk monitoringRisks don’t disappear once a deal has been signed. Due diligence and monitoring should continue during the full investment lifecycle. This is especially the case if a fund acquires a stake in a company with poorly resourced legal or compliance departments.But effective risk monitoring isn’t about trying to find a needle in a haystack. A risk assessment should guide the process from the start, allowing you to rank portfolio companies according to their risk profiles and divert monitoring resources accordingly. 3) Resourcing: the role of technology & automationWe all know that a Google search isn’t adequate due diligence – even if you skip to the golden page 15 of the search results. A much broader range of resources needs to be combed through, taking a seemingly impossible amount of manual effort for a small team. Innovative compliance and legal teams in private equity have realised this early, embracing the role technology has to play in automating the time-consuming manual work required in pre-investment due diligence and the ongoing monitoring of portfolio companies.Potential sanctions, bribery and other risks can be identified quicker and easier with technology-enabled solutions – allowing your team to focus on analysis and making decisions that protect the value of your investments.For more information about how Exiger can help enhance your compliance programme, or that of your portfolio companies, please contact us.–(1) Boston Consulting Group, Private Equity is Hot But Not Overheating, April 2018