Dangers Arising from Poor Quality Due Diligence into IPOs and Political Risk Issues

The spate of IPOs in Hong Kong in recent months is a testament to the strength and versatility of Hong Kong’s financial system, for which the city should be congratulated.

However, it is worth noting that public disclosures as to inadequate due diligence by sponsors responsible for IPO and RTO candidates have in the past led to public calls for more regulation, and even for the introduction of criminal penalties against errant sponsors, banks, professionals and brokerage firms in Hong Kong. The risk now is that this situation could arise, once again.

The harsh reality is that, over the past twelve years, incidents involving malfeasance, fraud and deliberate market abuse and manipulation have increased – and some IPOs and RTOs are particularly difficult to evaluate in-depth, without independent investigation.

Moreover, heightened levels of political risk mean that engagement in what appears to be a purely commercial project could yet result in regulatory or criminal action, not only in Hong Kong, but also in the US, and elsewhere.

In that context, we would stress that Due Diligence or Investigative Due Diligence, which is how we at Steve Vickers and Associates (“SVA”) like to describe the process, is not merely a technical exercise, or one where spread sheets and legal documents are evaluated in isolation.

Rather, the process should involve the close examination of organisations, their leaders, and an understanding of the actual status and operations of IPO candidates; so as to enable a “real world assessment” of the suitability of candidates for listing.

The risk is that a virtual “commoditisation” of the due diligence exercise has degraded the DD process across the financial services industry. We have observed the emergence of a culture, whereby negative reputational reporting on listing candidates tends to be excluded from the process and where only, “publically available data”; i.e., only that available on Google or in the media is addressed. Clearly, this approach is unsatisfactory and dangerous.

Over the past 20 years, I have handled hundreds of IPO/RTO and M&A related investigative due diligence assignments across Asia Pacific and beyond.

SVA (www.stevevickersassociates.com) is fully equipped to offer independent, in-depth, dispassionate and practical Investigative Due Diligence in support of the process. Our independence is drawn from the following key factors:

  • We do not seek future mandates from our investigative targets.
  • We do not seek future banking relationships from our investigative targets.
  • We do not seek future accounting or consulting work from our investigative targets.
  • We will report all that we know and that which we evaluate to be relevant to the process.
  • We have no financial interest in whether or not the IPO/RTO is successful; our fees are the same in either event.
  • We are not conflicted, either in practice or in theory, and SVA can be relied upon for an independent, objective and fair assessment.
  • We have the experience and credibility based on our principal’s 36 years of operational experience, both in government and in the private sector in Asia.
  • We will not be bullied or restricted in the scope of our work and, under such circumstances, would simply resign from an assignment.

We have laid out SVA's truly independent approach to conducting Investigative Due Diligence work in the explanatory sheets below:

There is also additional material on our website as to supporting the IPO process: http://www.stevevickersassociates.com

If we can be of assistance to your organisation in dealing with these complicated issues and if you wish to protect your business from the negative consequence of poorly conducted due diligence efforts, please do not hesitate to contact us.

SVA (www.stevevickersassociates.com) is a specialist risk mitigation, corporate intelligence and risk consulting company. The firm serves financial institutions, private equity funds, corporations, high net-worth individuals and insurance companies and underwriters around the world

SVA has particular expertise in Macau and its gaming sector, with attention to its reliance on capital outflows from mainland China, the junket market, the role of triad societies, and broader geopolitical risks.

CEO Steve Vickers has given expert evidence to formal inquiries and court actions related these issues, in many jurisdictions, including Hong Kong, the United States, and Australia, repeatedly over the last 15 years.

SVA also has a dedicated crisis management team which, for our retained clients, stands ready to assist companies during crisis situations. Retained clients pay an annual fee for a 24-hour response capability.

SVA is based in Hong Kong and is the only firm with the local and senior expertise drawn from Intelligence, Operations and research functions of the former Royal Hong Kong Police Force.