When government policy provides value creation opportunities

Across the spectrum of due diligence there is, understandably, a focus on risk identification and assessment. This is also true for political, policy and regulatory due diligence, with PE deal-teams interested in whether and how Brexit or a Corbyn government could pose risks to an asset’s business model or key markets.

But private equity and their companies are increasingly interested in how political and regulatory changes can drive market opportunities. Our due diligence is moving away from ‘risk confirmatory’ projects (to identify and mitigate key risks), to identifying policy-driven opportunities and recommending measures to take advantage of these opportunities, such as improving an asset’s credentials for public sector tenders

Below we discuss two examples of what taking advantage of policy-driven opportunity might look like:

‘Best practice’ approach to standards

From debt enforcement to the private rented sector we are seeing increased moves to regulate at a national government level.

GK does political due diligence for many assets that already lead in their sectors in terms of standards. These businesses are in a strong position to influence industry standards and can establish or reinforce a market leadership position by driving standards, sharing best practice and leading industry and policy discussions about professionalising a sector or improving regulation or enforcement. .

Even where higher government-imposed standards are not imminent, a best practice approach can have significant benefits. For example, public-sector facing businesses are coming under increased scrutiny in a public procurement environment suffering from years of budget cuts and the fallout from recent high-profile outsourcing failures.

Councils are increasingly looking to build flexible, long-term partnerships with suppliers, putting businesses with demonstrably high standards and a corresponding brand reputation in a strong position to win tenders. This can mean establishing KPIs and systems to demonstrate compliance and the maintenance of high quality standards or a commitment to being a responsible business (e.g. ensuring they have strong policies and objectives around social value, diversity and emissions management, for example)

Nowhere is this more evident than in sectors that involve contact with vulnerable people, where mistakes can have long lasting reputational impact. More and more public tenders and commissioning bodies are expecting clear policies and training programmes to help identify and engage with vulnerable consumers responsibly.

Data-hub opportunity

In many sectors we work in there is a push for greater digitisation and effective use of data to target customers and deliver services. Investors should be aware of where there are opportunities to collect and utilise data, especially where this capability enhances a business’ position in its value chain.

For businesses that provide services on behalf of local or national government the Digital Economy Act 2017 presents significant opportunity that is not yet being taken advantage of.

The Act allows sharing of personal data between public authorities and third parties for the purposes of delivering public services. Though many local authorities are understandably cautious about data-sharing with the private sector we know that it is being used effectively where third parties can make a strong case for it.

As authorities become more comfortable with this practice there will be a clear advantage for businesses that have positioned themselves as trusted partners, with a reputation for high data protection and service delivery standards. To achieve this companies will need both comprehensive ESG and compliance processes and an effective communications strategy in place.

As these examples highlight, being aware of the policy landscape in highly regulated sectors allows investors to prepare for the first 100 days and beyond by getting ahead of changing standards, actively shaping government policy through lobbying and thinking strategically about an asset’s position in the value chain.

GK works with investors at the due diligence phase and beyond to achieve this, identifying key policy-driven opportunities pre-acquisition, and developing compliance and communications strategies to help portfolio companies take advantage of them.

See more articles by Olivia Rohll