10 November 2019

Due diligence for emerging markets – what works?

Emerging markets can offer good returns for investors but these come with increased risk. How can investors and
lenders ensure they are making fully informed investment decisions and have in place commensurate protection?
We have seen how emerging market risks have resulted in Fraud – management or the promoter intentionally
large scale restructurings and corporate collapses in Asian misleading investors and/or siphoning assets/cash out of the
and other emerging markets. business

By recognizing the warning signs and red flags during due Weak legislative regimes – difficulty in presenting a credible
diligence, we can readily establish whether there are rational legal threat to rogue management or shareholders, or deriving
explanations for them or whether investors should beware. recoveries through the courts or enforcement

Different transaction and security structures can result in very
different outcomes for investors and lenders when
investments do not go to plan.
When assessing investment opportunities, thorough due
diligence, tailored to address the nuances of emerging
markets, will enable investors and lenders to appraise any
investment and maximise returns. Designing and
implementing an effective investment structure is critical for
emerging markets investments.
Some of the common issues encountered when doing
business in emerging markets include:
Incomplete or inadequate information – lack of available,
accurate and/or complete information or management
reporting
Audit limitations – ineffective audits resulting in material
misstatements in reported earnings and/or asset values
Borrelli Walsh has extensive experience in stressed and
distressed situations, acting for lenders, investors and
companies to assess these situations, the options available and
our recommendations for the optimal outcome in the
circumstances.
As an independent restructuring firm, we are intimately aware
of the risks of doing business in emerging markets. Every
year, we undertake billions of dollars of restructurings and
other transactions. This experience provides us with unique
skills and insights from which we are able to tailor our due
diligence services and solutions. We advise investors and
lenders on the merits and risks relating to potential
investments and how to structure the investment to safeguard
against potential risks.
This summary describes the difficulties encountered by
capital providers in emerging markets and the due diligence
approach that Borrelli Walsh adopts to establish and minimise
the associated risks.

Challenge Issue Due diligence approach

1. Management • Lack of fully integrated • Identify at the outset of the transaction what information is
information is accounting systems - incapable available and information limitations
often incomplete, of producing regular and/or
inaccurate or accurate accounting data • Establish other information and procedures that may be
insufficient available to address the needs of the investor/lender
• Inaccurate and/or unreliable
financial models underpinning • Stick to the basics - vouch management accounts to
long-term business plans underlying supporting information – including bank
statements, invoices and purchase orders

• Verify the accuracy and integrity of the company’s financial

model – if it is overly complicated, prepare a simplified
model that allows the investor to understand and sensitise
forecast performance and its potential impact on their
investment
 Challenge Issue Due diligence approach

2. Audit limitations • Audits can be a poor substitute
for professional skepticism and
basic enquiry and inspection
• Lack of skepticism in respect of
subjective accounting
treatments and valuations
• Fee pressure impacting quality
control
• Reconcile management accounts to audited accounts – are
there adjustments between the two, what are they and do they
make sense? No adjustment is as big a red flag as many
adjustments
• Understand applicable accounting standards – is there scope
for the company to manipulate earning/ asset values using
subjective accounting standards? Understand the
assumptions and approach. Does it make sense and is it in
line with the industry?

• Reconcile reported cash movements to earnings – if there are

consistently large variances, what does this suggest about the
quality of reported earnings, the reported value of assets
and/or the working capital/capex requirements of the
company? Are these in line with industry practice and do
they make sense commercially?

• Meet with the auditor and understand their processes and

concerns

3. Fraud • We see varying degrees of fraud • Does the business generate cash from operations?
in many restructurings
• Have borrowings ballooned in recent years?
• This can range from the
covering up of poor business • Is the borrower targeting less sophisticated investors as its
performance to, in extreme debt pile grows?
cases, businesses being
established with the express • Is there an overly complex group structure without
objective of defrauding justification?
investors
• Are there large intercompany or related party transactions
and balances? Do related parties constitute some of the
largest customers and counterparties?

• Have you physically inspected the operations and assets that

appear on the balance sheet?

• Are there large and unexplained working capital balances

that are out of line with industry norms?

4. Weak legislative • Legislative regimes vary • Understanding the nuances of and risks to structures will
regimes between countries and can help establish effective means of protecting against
result in transaction structures downside risks
and security being ineffective
• Effective use of Director/Legal Representative/ monitoring
accountant roles to provide ongoing monitoring and
reporting to investors and lenders

The Borrelli Walsh team has significant experience providing clients with due diligence services in emerging markets spanning
various industries, as well as ongoing monitoring and directorship services. We would be happy to discuss how our approach has
assisted our clients in evaluating potential investments.

www.borrelliwalsh.com
CONTACTS
Jason Kardachi Patrick Bance
Managing Director, Singapore Head of Corporate Advisory
T: +65 6603 0795 T: +65 6603 0500
M: +65 9101 2123 M: +65 8799 7881
E: jk@borrelliwalsh.com E: ptb@borrelliwalsh.com

Ben Crilly Simon Ma

Director, Jakarta Director, Hong Kong
T: +62 21 3000 2217 T: +852 3761 3842
M: +62 817 649 4748 M: +852 9822 3911/+86 138 1187 6104
E: bjc@borrelliwalsh.com E: sm@borrelliwalsh.com

Sam Tai
Director, Hong Kong
T: +852 3761 3865
M: +852 9280 9540
E: st@borrelliwalsh.com

Disclaimer: The information provided in this update does not, and is not intended to, constitute accountancy, tax, investment or
other professional advice. Specific advice should be sought about your specific circumstances. Please contact the Borrelli Walsh
team at bw@borrelliwalsh.com.

www.borrelliwalsh.com