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This is the first article in a series of five were we present our take on how the most effective PE firms approach due diligence in China.
1. Maintain strict standards
Successful fund managers never compromise their investment principles to “do a deal”. They stick to their strict standards even when there is pressure on the fund to put money to work. Fund managers who lower their standards might get deals done, but their reputation will suffer in the long run as their portfolios fill with troubled companies.
2. Strengthen fundamentals
Leading funds gain competitive advantage by strengthening fundamentals. They increase their deal sourcing efforts by spending more time actively identifying and pursuing high potential companies. They strengthen their ability to add value to portfolio companies and market these abilities to potential Targets.
Our Perspective: Is less due diligence a competitive advantage of “Chinese” private equity funds?
There is a misconception that “Chinese” private equity firms have made less due diligence a competitive advantage. The point has been made that “having less thorough due diligence is actually a comparative advantage for Chinese private equity firms, especially as they face increasing competition in the market.”(link) We believe this claim is problematic on two fundamental levels.
First, it would be incorrect to say that local firms always conduct less thorough due diligence. From our experience, leading Chinese funds often tend to spend more time than foreign firms getting to know Targets on the ground in China before deciding to go ahead with a deal. This relationship building phase is an important form of screening ,or preliminary due diligence mechanism, to which most experienced Chinese fund managers devote significant time.
Secondly, it would be wrong to assume that the Chinese funds that do indeed compromise their due diligence in order to strike deals will be more successful than those who decide to find out what they buy before striking a deal. We believe Chinese firms (and foreign ones) that compromise on due diligence will perform poorly in comparison to their peers and that, in the long-run, their returns will suffer.
Read the other posts in our series how the most effective private equity firms approach due diligence in China:
Learn more about our methodology and approach to Private Equity Due Diligence and China Acquisition Due Diligence, to discuss how we can help you organization please contact us.