3 December, 2018 Peru

Panellists urge PE buyers to dig deeper in due diligence

Corporate / M&A

Increasing Foreign Corrupt Practices Act (FCPA) enforcement means buyers asking probing questions about target companies no longer risk competitive disadvantage, since there is now a greater acceptance in favour of more thorough due diligence among both buyers and sellers, heard delegates at Latin Lawyer Live 9th Annual Private Equity.

Panellists urge PE buyers to dig deeper in due diligence
Maria-Leticia Ossa Daza, William Haegele, Richard Fogarty & Rafael Boisset

Pushing for transactional data – a list of payments made by the target company over a period of time – might have put a private equity buyer at a competitive disadvantage five years ago, but nowadays it is more common. “Any push to get transactional data was not accepted by the seller and the deal teams would push back. I heard over and over again ‘you’re going to put us at a competitive disadvantage by asking for that information,’” said William Haegele, a partner at KPMG who focuses his practice on Brazil. “Now the deal teams that work on the transactions are more accepting of a slightly deeper dive into the issues.”

This is replicated on the sellers’ side too. “They’ve got to be willing to be very open,” said Rafael Boisset, partner at Philippi Prietocarrizosa Ferrero DU & Uría (Peru). “This is a sensitive issue and – as a seller – you should expect a very aggressive approach from the potential investors.”

Boisset also discussed the complexities of FCPA due diligence from a local perspective, especially in multijurisdictional transactions. Latin American countries have made varying degrees of progress in enforcing anticorruption compliance, making it hard to guarantee the protection of assets in different jurisdictions for private equity investors. “The challenging thing in a multijurisdictional private equity transaction is conducting FCPA due diligence and being sure that the companies you’re acquiring are putting in place very strong compliance programmes,” he said.

This can be made complicated by the fact the availability of public records on company activities varies across Latin America. Richard Fogarty, managing director at Berkeley Research Group, said there are likely to be gaps in public records. “They are not always reliable, even if it is available” he said. Availability varies between each jurisdiction in Latin America, he added. Brazil has worked to improve access and accuracy of public records, while other countries are behind.

Latin America has so far seen few whistleblowers play a role in corruption scandals, but panellists think this could change. Referring to Operation Car Wash and the investigation into Odebrecht in Brazil, both of which prompted strong backlash from the Brazilian public, Haegele thinks whistleblowers could start coming forward more often in Latin America. “People feel they have been cheated,” he said. “They’re more likely to come forward not because of some monetary reward but because now it’s become acceptable to complain about it. They now feel they have a voice,” he said.

Private equity investors are at risk if a whistleblower comes forward after a purchase closes and reveals improprieties at a target company. For external counsel part of due diligence includes gauging how seriously companies actually take their compliance programmes. If companies only have a compliance programme on paper but not in practice, there is a higher risk a whistleblower will come forward after the transaction closes, said Haegele.

Maria-Leticia Ossa Daza, partner at Willkie Farr & Gallagher LLP in New York – who moderated the panel – said Latin American companies must change their perception of compliance programmes. “It’s not only about having a compliance programme, but it is having compliance training for company employees,” she summarised.

Latin Lawyer Live 9th Annual Private Equity took place at Simpson Thacher & Bartlett LLP’s New York office in September. Simpson Thacher partner Todd Crider co-chaired, alongside Jean Michel Enríquez of Mexican firm Creel, García-Cuéllar, Aiza y Enriquez SC.

Earlier coverage of the conference considered the role Latin American pension funds play as a source of fundraising for private equity firms; the ways private equity lawyers can prepare for an increasingly complex regulatory environment; and summed up why private equity investors still see Latin America as an attractive investment environment, despite market volatility and corruption scandals.

Source: Latin Lawyer

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