NOV, 2009
By Zack Henry & Eric Saucedo
Financial Transparency
This is perhaps the mother of all issues when considering the more common challenges in successfully raising private equity capital. And it’s not an issue solely relevant to Brazil and/or Latin America, as it is an issue facing any early-stage or middle-market company worldwide looking to raise capital via the private equity market. It is the subject of much frustration among private equity professionals and company executives alike, and perhaps the single most common reason why most potential transactions reach an unfortunate and untimely death.
Let’s first remember that a principal factor of the current financial crisis was the simple annihilation and obliteration of trust. Investors lost trust in the financial system, they lost trust in bankers, ratings agencies, federal regulators, the words “collateral” and “obligation,” and in the American dream of home ownership. Even “In God We Trust” lost plenty of strength and credibility as the US greenback fell to and continues to trade at historic lows. Call it “The Great Recession,” “The Great Depression 2.0,” or just the global financial system going to hell in a hand basket. The point is that financial transparency fell by the wayside and with it went investor trust.
At the 2009 World Business Forum in New York City, David Rubenstein of The Carlyle Group, Nobel Prize winning economist Paul Krugman and former President Bill Clinton addressed many of the important issues regarding the current global economic conditions as a result of the crisis. But Dennis Nally, Chairman of PricewaterhouseCoopers International Ltd., said it best and most succinctly, stating that a global recovery rests upon the notion of restoring trust and “transparency is the lifeblood of investment.”
Amen, Mr. Nally. Sounds easy enough. Now let’s just get out there and apply that simple principle to private equity investments in Brazil and other emerging markets. As we say here in America, “Giddy up.”
Unfortunately, it is the very rare occasion that typically family-owned companies will maintain the accounting and financial controls and reporting sufficient to thoroughly satisfy a comprehensive due diligence process of a private equity fund. Therefore, any sort of summary report prepared by the company’s accounting staff or even by the company’s accounting firm on the company’s financial results and condition will not suffice. Period, end of story. In a nutshell, many family-owned companies do not have the adequate financial and accounting infrast.....