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Walking through the Due Diligence Process with Kairos Capital Group

Updated: May 10, 2023


Before investing in private equity, it's important to fully understand the potential risks associated with the investment. To manage those risks and make informed investment decisions, private equity firms conduct due diligence on potential targets. The due diligence process is critical in assessing the target company's potential risks, liabilities, and opportunities for growth. This process is typically led by a team of experts, including investment professionals, lawyers, accountants, and industry specialists, who evaluate different aspects of the target company.


A common due diligence process would start with understanding the industry trend and landscape of which the firm is operating in. Typically, the market size and addressable market should be large for the company to scale. It is important to identify the underserved segments and how the firm can add value and capture market share. Zooming into the target company specific, strategic due diligence is conducted to evaluate the company's growth potential, market trends, and competitive landscape. This helps investors assess the company's potential for growth and make informed decisions about investing in the company.


One critical component of due diligence is financial due diligence, which involves a comprehensive analysis of the target company's financial statements, performance, and projections. The team aims to identify any discrepancies, risks, or opportunities that may impact the company's value and potential for growth. More often than not, the target company would have provided their financial forecast to ensure that investors have an estimate of their growth projections. Thus, private equity should question the assumptions and underlying thesis for these forecasts. It is also critical to evaluate any financial obligations the company has. Ultimately. financial due diligence helps private equity investors understand the target company's financial health and provides an indicative valuation of the company.


Moving on to operational due diligence, the target company is evaluated on its operational structure, systems, and processes to identify any risks, inefficiencies, or opportunities for improvement. This includes a review of the target company's supply chain, production processes, technology systems, and human resources. The aim of investors could possibly be to streamline operations and allow the company to be more efficient. Discussions on ways to reduce cost or improve economies of scale can help the target company achieve profitability. Operational due diligence helps investors understand how the target company operates and whether it has the potential to improve efficiencies and grow in the future.


The target company should also be able to provide legal documents and proof as part of their disclosure. Legal due diligence assesses the target company's legal risks and liabilities by reviewing contracts, licenses, permits, litigation history, regulatory compliance, and other legal matters. Trademarks and safety marks (i.e. food safety labels for companies operating in the F&B industry) should be obtained. Legal due diligence helps investors understand any potential legal risks associated with the investment, such as pending lawsuits or regulatory issues that could negatively impact the company's value. One way would be to hunt for any adverse news of the company present in the past few years. This part of the process will usually be outsourced.


Finally, IT due diligence can be incorporated as an essential component of the due diligence process, especially if the company is heavily dependent on IT. IT due diligence involves evaluating the target company's IT systems and infrastructure, including hardware, software, cybersecurity measures, data privacy policies, and IT governance processes. This can be tied in with operational due diligence to identify any potential risks or inefficiencies and assesses the potential for future growth.


In conclusion, the due diligence process is a critical step in private equity investments. At Kairos, we conduct strict due diligence and provide a comprehensive perspective to understand a target company’s full potential. With our extensive and global network, we are able to gain insights from experts of various field and industry to support our research. The process is rigorous as we go through each stage of the due diligence journey where decision is made based on the team’s consensus. We also aim to create value by providing guidance in acquisitions, joint ventures and partnership, supported by partners and family offices globally. With an exemplary track record in investing in category winners, including unicorns, we prove our ability to source and screen deals successfully against our investment rules. Eventually, we evaluate the possible deal structure and exit options to ensure that the investment reaches its fullest potential.

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