Investors hire sleuths to vet China bets

Financial Times

Henny Sender

Steve Vickers was interviewed by the Financial Times on due diligence in China:

“Much of the business of investigators involves picking up on red flags that accountants do not always detect. Steve Vickers, a veteran of two decades with the Hong Kong police and now head of his own consultancy, Steve Vickers and Associates, says such red flags include margins that are way out of line with competitors’ as one obvious pointer to possible wrongdoing. Revenue recognition policies are also examined very closely, as changes in such policy can be indicative of serious cash flow problems; in addition, related party transactions or “Round Robin” transactions to inflate sales or create artificial sales volume are common.

Investigators add that there are big differences between the work they are contracted to do by investors and companies putting their own money in a transaction compared with those using other people’s money, including an investment bank bringing a company public. Sometimes, the assignment in the latter case involves a “tick the box approach” with all kinds of constraints to in effect limit the possible reasons not to proceed with a deal, according to Mr Vickers.

For example, he says, certain deal teams in US investment banks require that he only consult “public records” and confine investigative efforts to where a listing will take place as opposed to where the operation actually functions. Private equity funds conversely want the maximum possible information and understand that derogatory information is not necessarily a deal killer; rather it facilitates a better structured deal and helps manages risk in the long term, he adds.”