Commercial Due Diligence Case Study

A Chinese entrepreneur with world-class, IPR-protected technology?

Situation
  • China focused private equity firm evaluating investment in a Chinese engineering company providing clean coal technologies (the ‘Target’)
  • Target seeking funds to commercialize IPR-protected technology
  • Success depended on ability to compete with dominant technology which already had a 91% market share
  • An individual involved in the development of the Target’s technology was offering competing solutions raising questions about the value of the Target’s IPR
Approach
Identified key issues, including:
  • Industry and market segment attractiveness
  • Competitiveness of Target’s technology
  • Suitability of strategy
  • Achievability of financial forecast
  • Ability to enforce IPR
Our research and analysis included:
  • In-depth management interviews and site visits
  • Interviews all along the Target’s value chain to obtain exclusive information
  • Interviews and discussions with independent industry experts and influencers
  • Detailed analysis of expected customer acceptance of the Target’s offering
  • Obtaining expert estimates about future end-user compliance with emission guidelines (key driver of demand)
  • Analysis of government and industry statistics
  • Creating financial forecast based on realistic assumptions to support the client’s return analysis
Result
  • Analysis revealed that the dominant technology was more competitive in an environment of low compliance with environmental regulations
  • We concluded that stricter enforcement would significantly increase the competitiveness of the Target’s technology due to lower total cost
  • Recommended Target to initiate IPR infringement case which it later won
  • The client invested in the Target at a favorable entry multiple
  • The Target – now the market leader in its niche – is on track for a domestic IPO
Team member comment:

“Given that the technology was unproven, investigating customer acceptance was key. The fact that customer acceptance depended on so many different variables made this a challenge. For example, a power plant operator burning high-sulfur content coal would benefit more from using the Target’s technology than an operator burning low sulfur coal. There was a whole range of these variables, some more easily quantifiable than others. In the end, a combination of interviews with existing and potential customers and analyzing total cost of ownership gave us the answer.”