In every practice, people should exercise due diligence in doing their jobs.
It’s likely that you’re already familiar with the term due diligence, a phrase popular in both law and business. If you’re not in the know about due diligence, here’s how the Merriam-Webster Dictionary defines due diligence as it relates to business: “research and research and analysis of a company or organization done in preparation for a business transaction.”
In big-money, high-stakes industries like private equity, failing to act with due diligence is the difference between winning big and losing everything.
What is private equity?
Some investments are more sound than others. Sought-after traits of investments include things like consistent performance, low risk, and rights to preferred dividends. Investments with these three traits, for example, are almost certainly solid stores of value.
Private equity is a type of alternative investment. Risks are higher, but so are their potential rewards. Individual investors and pooled-together managed funds alike break into private equity in hopes of striking success.
Public companies are listed on stock exchanges. Private companies, on the other hand, are not. Private equity firms seek one of a few avenues:
- Direct investments in private companies.
- Public company buyout.
- Purchasing majority shares in private companies.
Due diligence isn’t exclusive to private equity
Put simply, practicing one’s profession with due diligence means to do one’s job well. Every practitioner of every discipline needs to act with due diligence in whatever activities their professions engage them in.
Why is due diligence so important?
If someone isn’t on the top of their game, they’re more likely to find themselves on the short end of the proverbial stick. Businesses want employees to perform to their full potential. Any organization’s employees should consistently and constantly perform due diligence throughout their working lives.
Private equity companies often accumulate substantial wealth prior to making any investments. Many private equity groups are made up of partners who put up their very own mountains of money for investment. As such, more is at stake when it comes to private equity business transactions. This is unarguably the number-one reason why due diligence is so important in private equity. In other words, because so much money is on the line in every transaction exercised by private equity firms, due diligence is more important to this field than any other.
Performing workplace duties with consistency will significantly increase the likelihood that using benchmarks and budget calculations will result in tried-and-true, unwavering, accurate outcomes. Benchmarking is important in many groups’ lines of business. Without setting standards and comparing benchmarks to current and past results, tracking growth becomes less likely to yield accurate results.
Negative outcomes of mistakes could be worse than you expect
In managing ultra-wealthy individuals’ hordes of wealth, losing one-tenth of a percent of a major portfolio’s value equals many millions of dollars. Being unable to explain where missing money ended up can result in multiple years of prison, hefty fines, and other heavy punishments.
Imagine an employee at a private equity firm isn’t feeling motivated one day. They might lower their standards due to a lack of focus, resulting in slip-ups in which securities, other common investments, and alternative investments lose hundreds of thousands of dollars in value – if not hundreds of millions of dollars.
Facing potential criminal penalties for simply failing to work hard isn’t worth it. Why not work hard on a consistent basis and essentially safeguard one’s self from losing financial licensure, experiencing positive reputation across local financial networks wither away, and otherwise get weighed down by potentially minor mistakes committed in the workplace.
Gauging a business’ level of due diligence exercised
As one might imagine, assessing the amount of due diligence or hard work within a business’ ranks is difficult. Many businesses hire companies like Corporate Resolutions to perform full-fledged business private equity due diligence investigations with the primary goal being determining the causes of workplace-wide shortages of hard effort and due diligence.
Gauging due diligence in such a manner often positively affects businesses after fixes to such problems are implemented.