Sun, Jul 26, 2015

Investigating Portfolio Companies, Post Investment

Kroll is a global name in the pre-investment reputational and discreet due diligence field. In many parts of the world, it is this specific service line for which Kroll is best known. This can range from a relatively straightforward background check, looking for obvious red flags, to something much more sophisticated and complex, sometimes across a number of international jurisdictions. However, clients are sometimes unaware of Kroll’s ability to investigate portfolio companies once an investment has been made, particularly if the investor suspects that there is a problem.

“Kroll is ideally positioned to bring in its full investigatory armoury, including investigatory forensic accountants, computer forensics, data analytics and interview teams to identify the scale of the problem and work with the client on remedial action”

Typically, such a requirement occurs when an investor becomes alerted to a risk issue at a portfolio company. This generally happens in a number of ways: a disgruntled employee (or former employee) whistle blows to the investor; the investor detects that the portfolio company’s performance is not what it was expecting, or was led to believe; the investor picks up rumours of a risk issue on the Internet, social networks or other personal or industry platforms.

This gives the investor a quandary: how does it better understand the nature of allegations which are being made without disrupting the operations of the portfolio company, destroying trust between the investor and portfolio company and possibly removing key management under a misapprehension, who may be essential to the operations of the portfolio company. In Kroll’s experience, such risk issues are usually connected to internal fraud; poor internal practices, including lack of accountability and poor ethical and compliance standards; unethical and undeclared relationships with partners and vendors; or unethical and nepotistic allocation of contracts. But this list is not finite. For instance, in one part of Asia, Kroll was asked to investigate a former employee who had left a portfolio company but stolen commercially sensitive material from the company. On another occasion, Kroll was asked to investigate rumours of an entire section of management leaving a portfolio company in order to establish a new competitor, again, stealing the portfolio company’s intellectual property.

Frequently an investor may not have access to internal documentation and digital media. However, using exactly the same methodology and skill set used in a pre-investment due diligence engagement, Kroll would be able to develop intelligence around the portfolio company in order to understand the key issues of interest to the investor. Very often, the investor will have a lot more information on the individuals and corporate structure of the subject portfolio company than they realise. Although this is an advantage to Kroll’s investigation, very often Kroll will have to develop covert sources working within the company, who are able and willing, on a discreet basis, to share information on the internal workings of the company. Given that the client, in these kinds of cases, is the investor, there is an added layer of discretion which Kroll must employ. Such cases are therefore extremely sensitive.

However, should it be proven beyond doubt that if there is a serious problem within the portfolio company, Kroll is ideally positioned to bring in its full investigatory armoury, including investigatory forensic accountants, computer forensics, data analytics and interview teams to identify the scale of the problem and work with the client on remedial action. Kroll’s value-add on such an engagement is that Kroll already has an understanding of the issues from the intelligence gathering phase of the project. Thus, if further intelligence gathering work focussed on a business partner, vendor or malicious former employee need to be undertaken, the entire operation can be run by the same team. Even the most assiduous and risk averse investors occasionally make mistakes or misjudge individuals. In the unfortunate event of this occurring, Kroll is ideally positioned to provide assistance.

This article was first published by Asian-mena Counsel, magazine for the In-House Community (www.inhousecommunity.com).



Forensic Investigations and Intelligence

The Kroll Investigations, Diligence and Compliance team are experts in forensic investigations and intelligence, delivering actionable data and insights that help clients worldwide make critical decisions and mitigate risk.