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 large scale restructurings and corporate collapses in Asian and other emerging markets.

By recognizing the warning signs and red flags during due diligence, we can readily establish whether there are rational explanations for them or whether investors should beware.

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
  • Fraud – management or the promoter intentionally misleading investors and/or siphoning assets/cash out of the business
  • Weak legislative regimes – difficulty in presenting a credible legal threat to rogue management or shareholders, or deriving recoveries through the courts or enforcement

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 information is often incomplete, inaccurate or insufficient
  • Lack of fully integrated accounting systems – incapable of producing regular and accurate accounting data
  • Inaccurate and/or unreliable financial models underpinning long-term business plans
  • Identify at the outset of the transaction what information is available and the information limitations
  • Establish other information and procedures which may be available to address the needs of the investor/lender
  • Stick to the basics – vouch management accounts to 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
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 in almost every restructurings
  • This can range from the covering up of poor business performance to, in extreme cases, businesses being established with the express objective of defrauding investors
  • Does the business generate cash from operations?
  • Have borrowings ballooned in recent years?
  • Is the borrower targeting less sophisticated investors as its debt pile grows?
  • Is there an overly complex group structure without justification?
  • 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 regimes
  • Legislative regimes vary between countries and can result in transaction structures and security being ineffective
  • Understanding the nuances of and risks to structures will help establish effective means of protecting against downside risks
  • 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.

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