logo
by Isabelle Hillson 30th April, 2019
3 min read

The value of political due diligence and post-sale consulting

Private equity investors are currently facing a number of different challenges. A vast amount of dry powder – capital waiting to be deployed – has pushed asset prices up to record highs, not seen since before the financial crash of 2008. The market is becoming overcrowded with players, which is in turn driving competition. In addition, there is a widely held belief that there will be an economic downturn in the near future, through which assets will have to be held.

When the stakes are so high, a comprehensive due diligence process gives private equity firms the reassurance they need ahead of making a significant investment and understand what political or regulatory risks may arise.

During a typical due diligence process, some advisers will include a paragraph on politics, if the asset is obviously exposed to a funding stream or policy initiative. However, this type of analysis does not go into the sort of granularity necessary to make informed investments or business plans. Private equity typically holds an asset for five years, and in that time a lot can change in politics, including the governing party. It is key to understand the risks and opportunities presented by the machinations of the incumbent government and, in a time where politics is becoming more polarised, to also understand how a change in government would affect the value of an asset.

Most businesses will be affected by politics in some way, be it through change of government risk, funding streams at a local or national government level, regulatory risk, Brexit risk and changes to tariff and trade policy. In the last year GK have provided political due diligence in a diverse range of sectors from education and healthcare to parking operators, apprenticeships providers, pharmaceutical drugs, and pension providers. The combination of prolonged political uncertainty at both a geopolitical and domestic level, and the expectations of an economic downturn, means that firms are looking at value creation to drive returns.

Post-sale, private equity will look to increase an assets value through various strategies such as bolt-ons, capital investment, or changes to products and pricing to drive efficiency. Regardless of the strategy, after acquisition most private equity firms will work towards a 100-day plan; whereby the asset undergoes significant change to help identify drivers of growth and create an effective business strategy for the next three to five years.

One often overlooked way to add value, due to the long-term nature of its return on investment, is engaging with government, or embarking on a communications strategy to raise the profile of a business within its sector or with government and regulators. Engaging with government helps mitigate any risks identified at the diligence stage, ultimately, protecting an assets revenue streams, creating a positive regulatory environment and boosting growth. Furthermore, once Brexit is out of the way, the Government will be hungry for ideas from the private sector to the fill the void of domestic policy making that has characterised the last two years in Westminster.

Our analysts have a unique perspective and insight into the policy making process from working closely with GK’s public affairs practice. We can equip investors and management teams with knowledge, insight and strategic approach to have an impact on policy.

See more articles by Isabelle Hillson