Due Diligence and Investee Performance

April 10, 2013 Leave a comment

Due Diligence and Investee Performance

Douglas Cumming York University – Schulich School of Business

Simona Zambelli University of Bologna – Department of Management

March 22, 2013

Abstract: 
We quantify the value of due diligence (DD) in the context of private equity (PE) investments. We relate DD to performance, including changes in return on assets and EBITDA/sales over the first three years after the investment. Based on a new and novel dataset comprising the majority of PE investors in Italy, we find evidence highly consistent with the view that DD improves performance. The statistical and economic significance of our findings is robust to consideration of endogenous determinants of DD. Our analyses of various sample-subsets also highlight that the DD carried out internally by fund managers has a more pronounced impact on performance. Puzzling results emerge, instead, for the DD performed by external agents, highlighting the existence of apparent agency costs associated with external DD.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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