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From the May issue of MERGERS & ACQUISITIONS.
There’s no question that the lending markets have tightened. With traditional banks facing regulatory issues, BDCs trading below book value and Collateralized Loan Obligations issuances down more than 50 percent from the end of 2015, leverage is not as easy to come by as it was in 2014 and 2015. With less financing available, the lenders that are open for business are selective about which credits they lend to.
For example, at the end of 2015, The Carlyle Group agreed to buy data storage unit Veritas from Symantec Corp. for $8 billion. In January, the deal price got knocked down to $7.4 billion after debt backing the deal failed to get syndicated. This situation is not unique; many private equity firms have faced challenges in the last six months. Although the problem is less pronounced in the middle market, deal makers need to be sure they are doing everything they can to get lenders to finance their deals at a good rate and in a timely fashion.
“It’s getting harder for private equity firms to get their deals across the finish line,” says Ian Bone, Senior Manager, Product Planning and Innovation for CT. “Having strong relationships with lenders can help private equity firms secure financing, but that’s simply not enough today.”
Completing extensive due diligence searches is a sure fire way to help assure lenders that the asset at hand is a solid credit that will perform accordingly. To help put their best foot forward buyers and their respective counsels are turning to firms like CT, a compliance and legal services provider, to have more thorough due diligence searches conducted for an extra level of confidence.
Due diligence used to be strictly financial. While financial due diligence is still extremely important, many other kinds of due diligence are becoming commonplace and can help lenders get more comfortable with a credit.
“There are many different types of due diligence today, some of which the traditional banks have started to require due to the increased regulatory scrutiny. However, while non-traditional lenders may not have to meet the same requirements, it can certainly help any lender understand a company or asset’s attributes and risks in a timely manner,” says Bone.
Reputational, business license, Anti-Money Laundering/Know Your Customer (AML/KYC) and industry-specific due diligence services are some of the newer types of due diligence searches that more private equity firms and M&A attorneys are requesting as part of their target evaluation and closing procedures.
In fact, reputational due diligence is becoming a go-to type of due diligence. As part of a reputational due diligence, many firms are opting to conduct negative news searches. When conducting a negative news search, CT combs through thousands of press outlets and alerts clients to any red flags or negative information that could affect the target acquisition’s reputation and be financially impactful.
AML/KYC has become an important regulatory requirement of banks to verify the identity and business history of individuals your firm is considering doing business with. In doing this search, buyers find out if any individuals involved in the company are politically exposed or pose an increased risk for the company. The search will also audit a person’s public record with the different regulatory agencies and identify any potential past abuses of their position. The AML/KYC search will also determine if anyone involved in the deal is on the U.S. government’s watch list or any international watch lists.
“Traditional lenders require this, but with tightened credit markets having AML/KYC checks completed will make a target more attractive to any lender. It removes counterparty risk, and can help the deal close more quickly,” says Bone. “Or inform the buyer if further investigation is required before they absorb the asset and it’s liabilities.”
Business license and intellectual property due diligence are also growing in importance. Understanding the IP will help buyers and lenders accurately derive valuations, locate trademarks, and verify copyrights and patents. To ensure continued, uninterrupted operation after the deal closes many buyers perform business license due diligence as well, which verifies that the required form and data filings for business licenses are in good standing and the company is able to operate without interruption or incurring potential fines from federal, state, or local agencies.
“The bottom line is, the more information you have on a target and the more red flags you can remove from a deal, the less likely the lender will have questions and concerns that could stall the deal, allowing you to close within the quicker timeline being required now,” says Bone.
CT, part of Wolters Kluwer, works with businesses around the world to offer customized capabilities and comprehensive business compliance and deal support services. Drawing on more than a century of experience, CT’s full suite of services can assist you from the beginning stages of due diligence, through the high-pressure stage of closing — offering expertise and continuity every step of the way.
Learn more about how CT can provide support for every stage of the deal, from due diligence to closing to on-going compliance. Contact a CT representative at 844-701-2064 (toll-free U.S.) or visit ctcorporation.com.
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