Managing Risk in the Deal Process

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As investment banks, private equity firms, and other capital markets firms face tremendous compliance obligations and other risk elements in their everyday work, evolving market forces and stricter regulations have accelerated the need for firms to streamline critical deal risk management activities.

Investment banks, for example, typically struggle with decentralized and siloed information. Similarly, private equity firms don’t usually maintain centralized systems for deal, relationship, and fundraising data. These challenges complicate firms’ conflicts-of-interest reviews and resolution. Often, firms overlook this process entirely because it’s not a standard part of the due diligence process.

Firms need to understand potential issues in the deal-making process where they should consider risk – especially conflicts of interest – in their due diligence and reputational risk management processes. Moving this deal risk management process earlier in the firm’s workflows saves time and effort.

 

Deal-Related Conflicts 

Firms should check former, current, and prospective mandates — even pitch decks — to ensure there are no potential deal-related conflicts; this can include checking NDAs or engagement letters for exclusivity clauses as well as any firm investments or holdings that may be in conflict with a proposed transaction.

To help quickly identify potential issues and resolve them, firms need an easy to use, integrated deal risk management process shared between dealmakers and the conflicts and compliance team. A process that integrates with multiple data sources reduces human error, increases productivity, and lets deal makers quickly respond to clients and focus on execution.

 

Personal Conflicts of Interest 

When starting work on a transaction, firms need to vet deal team members for any personal conflicts of interest. These can include any outside business activity with the potential client or other involved party,  such as board membership, equity stakes, or familial or friendly ties with senior managers.

Identifying these types of issues early on — before they can derail a transaction or a key person’s ability to work on it — is very important. It’s vital to integrate your deal risk management conflicts and compliance workflows into your deal process, and connect with multiple systems that contain potential holdings.

 

Industry Exclusivity or Key-Person Limitations

Tracking situations where your firm may have an obligation to a client to avoid work with various entities — a particular organization, set of clients, or sector — can prove challenging. Prior to making this type of commitment, firms must complete a thorough review of its implications on potential transactions, and obtain management approval. Identifying new deals that could be in conflict with these obligations requires a review process integrated with the deal risk management process, reinforcing the need for early identification and resolution.

 

Firm-Level Reputational Risk 

Ensuring that current and prospective clients and potential deals fall under the reputational risk tolerance of a firm begins with appropriate governance and tone from the top from senior management. It’s important to maintain a robust and effective process to manage the reputational risk from day-to-day.

For example, if firm leaders make an explicit choice not to work with companies with exposure to a given industry, the firm needs a reputational risk process integrated into the overall deal flow to help risk professionals review potential clients and deals, capture discussion points, and explain decisions. Firms should design this deal risk management process to help identify conflicts of interest issues at the earliest opportunity, ensuring the team doesn’t expend effort on a transaction they won’t be allowed to pursue.

Without collaboration and commitment to modern deal risk management strategies — and without databases that centrally house all data for disparate geographies and business divisions — banking and investing teams waste precious time, letting potential deals slip by or proceed with fatal flaws. Many teams tell stories about progressing far into many deals before uncovering potential conflicts and compliance issues. Once these teams establish the right system to identify concerns early on, professionals can save time working with the right prospects.

 

An Improved Conflicts of Interest Process

Modern financial firms improve conflicts clearance processes by implementing an integrated deal risk-management solution that helps their teams unify, automate, and streamline the conflicts process from the earliest deal stages.

Capital markets firms can successfully integrate their deal risk management process into overall due diligence workflows. Using a solution that streamlines the conflicts process helps firms reduce potentially negative exposure as stricter regulations and added compliance measures become more prevalent.

Firms can use DealCloud Conflicts to automatically perform a comprehensive analysis of restrictions, act as a single source of truth for all relationship and deal activity, and reduce operating costs by automating handoffs and approvals.

 

 

Learn how DealCloud Conflicts extensive audit capabilities help your firm manage compliance and build a competitive edge in the marketplace.

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Author:

Amanda Tooker

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