Tag Archives: Due Diligence Finance

Outsourcing client due diligence (OCDD) works crucially for modern-day business operation activities such as finance, legal, healthcare, and technology. It entails processes that require compliance with regulatory requirements; reduction of risks; and trust from stakeholders. However, given the ever-more intricate nature of both global regulations and incoming data, most organizations are finding it virtually impossible to manage CDD in house, accepting client due diligence outsourcing as a strategic solution for overcoming all these challenges while serving as a springboard into the future of expansion and innovative options.

Value Proposition of Outsourcing Client Due Diligence

Efficiency of Cost

Typically, outsourcing Client Due Diligence saves organizations the costs of constructing infrastructures, technologies, and personnel for customer due diligence processes; instead, they can join the specialized private consultants to access high-end solutions at a fraction of cost of running them in-house. According to the recent Deloitte 2023 survey, the average operational costs of CDD outsourcing companies have decreased by approximately 30%.

Skills and Technology

A third-party solution will bring along its wealth of experience and newest state-of-the-art technologies like artificial intelligence (AI) and machine learning (ML). These technologies perform all repetitive works, create excellence, and truly enlighten business compliance-in-advanced. For example, an AI evaluates thousands of customer records within minutes and flags compliance issues related to international regulations.

Elasticity

This capacity allows companies to allocate their operating scales according to market wealth or demand imbalance as outsourcing includes the flexibility of scaling an operation down or up, particularly in transitive industries like fintech and e-business, where it can be sometimes sudden and unpredictable.

Improved Risk Reduction

Outsourcing Client Due Diligence services gives multiple benefit that helps to from stronger risk assessment frameworks to providers. Most of these providers have big access to global databases, local expertise, and best practices, all of which considerably reduce the possibility of errors, fraud, or noncompliance.

Concentrate on the Core Business Activities

Core areas of the business are driven by delegation of crucial, yet time-consuming, due diligence jobs to outside experts. Thus, they are able to deliver innovation, customer satisfaction, and, finally, profitability.

 

Trends That Are Shaping the Future of Outsourcing Client Due Diligence

According to the changing technological sky, the cloud will be complemented by various regulatory guidelines and change in business priorities. Discussed herewith are trends that would become the face of Client Due Diligence outsourcing in the future:

Industry-Wise Adoption of Outsourcing Client Due Diligence

Industry-Wise Adoption of Outsourcing Client Due Diligence

Artificial Intelligence and Automation

There are really revolutionizing processes in Client Due Diligence through automating the customer identification processes and analyzing huge transactional databases for possible risks that would otherwise have to be manually scored. The output is faster and more accurate, with comparatively lesser manual errant attempts. The recently released report by PwC mentions that as much as 68% of outsourcing firms have declared plans to invest in AI for compliance output applications.

Blockchains Technology

Blockchain technology is made to revolutionize due diligence by giving secure, tamper-proof, transparent documentation of transactions and identities. This development will ease the entire verifications and minimize frauds while reinstating the trust of business and consumer.

Applying Data Analytics

They are starting to use the big data analytics to complement the services that they provide through third-party contractors outside compliance. It may simply take business decisions in accordance with signals in market behavior or consumer behaviors patterns. 

RegTech partnerships

RegTech is fast becoming an integral part of outsourcing Client Due Diligence processes. Other than direct contact with a RegTech provider, outsourcing Client Due Diligence providers can offer their own customized, industry-specific compliance solutions as they collaborate with the RegTech companies. In the financial sphere, for instance, RegTech will guarantee compliance with strict AML and KYC regulation

Comply with the ESG Criteria

Increasingly, environmental, social, and governance (ESG) factors are in the outsourcing client due diligence process. Outsourcing providers have layered ESG evaluations into their services for the enterprises to realize an alignment between themselves, investor expectations, and several regulatory standards.

Globalization and Localization

For example, when businesses enter the international marketplace, the demand is usually quite high because of the localized know-how they have in navigating their respective regulatory environments. Global reach and local knowledge are ideal combinations when you want to serve such needs.

Outsourcing Client Due Diligence: Market Analysis and Projections

The entire outsourcing industry is booming, and the Outsourcing Client Due Diligence part is also keeping pace. Some major data related to this are as follows:

Outsourcing Client Due Diligence – Market Growth

Outsourcing Client Due Diligence – Market Growth

Client Due Diligence: The Market Size

Approximately $261 billion was the estimated market size for global outsourcing in 2022, and it is expected to soar to $620 billion by 2030, at a compound annual growth rate of 6.5% (Statista, 2023).

Demand for Client Due Diligence

The demand for Outsourcing Client Due Diligence will be growing almost up to 25% yearly until it approaches compliance mandates or becomes a necessity for effective and useful compliance processes.

Cost Reduction

More than 70% of companies that resorted to Outsourcing Client Due Diligence confirm significant cost savings and better compliance rates (KPMG).

Case Studies: Success Stories in CDD Outsourcing

A Top Financial Institution

An international bank found an outsourcing company that would help it in improving KYC processes. The providers used AI and blockchain technologies, leading to the 40% reduction of time onboard; this could be reused for better compliance with AML regulations, where they found the savings of 15 million dollars per year for the bank.

A Multinational E-commerce Company

With a rapid expansion into emerging markets, an e-commerce titan decided to outsource its client due diligence operations. The localized experience of the provider meant the reassuring compliance with local requirements, meaning that the customer acquisition rates swelled, enabling a smooth market entry while being 20% higher.

Magistral Consulting’s Outsourcing Client Due Diligence Services

Customer ID and Verification

This service is proved by KYC of Magistral Consulting, wherein its company verifies customer identities. They can do it with official identification papers. Such papers were screened with the world sanctions list, the list of the worldwide watchlists and PEPs. Therefore it follows the principle of law to bring in among the stakeholders their trust.

Anti Money Laundering and Risk Assessments

The company runs a full risk assessment of whether there are red flags associated with money laundering. Advanced due diligence on customers marked risky will be performed, for example, background review, adverse media analysis, and ownership structures, through the profiling of the beneficial owner during the risk profiling exercise that will enable it to carry out such action considering the compliance requirements.

Compliance with the regulatory environment and monitoring

Magistral adheres to the local and international standards, which include FATF, FinCEN, and EU AML directives. They keep the reporting and conduct internal audits and follow up with continuous compliance monitoring by sending the required periodic updates in client profiles. The document management service further streamlines the compliance process by efficiently handling onboarding and monitoring requirements.

Technology Integration and Analytics

Advanced technologies such as AI and automation have made the due diligence of Magistral more efficient. Custom dashboards and workflows allow real-time tracking, minimize errors, and speed up data collection and analysis. Innovations such as these ensure accuracy and operational efficiency in compliance activities.

Market-Specific Expertise

Magistral Consulting brings solutions specific to the financial institution and private equity house, asset management, and corporations. Its special due diligence service offered to mergers, acquisitions, and investment transactions addresses special needs for a market while offering great compliance with smooth transactions.

 

About Magistral Consulting

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates, and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modelling, Portfolio Management, and Equity Research

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The article is authored by the Marketing Department of Magistral Consulting. For any business inquiries, you can reach out to prabhash.choudhary@magistralconsulting.com

Indeed, OCDD has scalable features which enable a company to change its operational strategy in accordance with demand from the market or the state of the economy.

ESG factors align businesses with investor expectations and regulatory standards, making them critical for sustainable growth.

It has been anticipated that by the end of 2030, the total global outsourcing market would rise to $620 billion, out of which a significant portion would come from the growth of OCDD.

The market is projected to grow at a compound annual growth rate (CAGR) of 6.5%.

What is Due Diligence?

Due Diligence Definition: It is an exercise done to check the quality of an investment before committing funds to it. There are lots of claims that are made by an asset manager, a company founder, a real estate developer, or anyone else who is interested in selling the asset or a stake of it thereof. These claims need to be satisfactorily validated before the funds are committed to buying the asset or a part of it.

 

Due Diligence in Finance

Due diligence is a general term of analyzing the investment before committing the funds. Financial due diligence concerns with the assets that generate returns and are financial in nature like private or public companies, start-ups, hedge funds, real estate, and real estate funds.

 

What does due diligence consist of?

Due diligence for financial aspects validates the claims of the seller through a detailed study of the documentation supporting the sellers’ claims. The Due Diligence period depends on the size and the nature of the asset on which it is being performed. The speed at which the data is made available also impacts the Due Diligence period. A start-up which is a small set-up could be checked in say a few weeks’ time, whereas bigger corporates may take months before the exercise for the whole company is performed.

Due Diligence Process

The process sometimes may take long periods and may require expertise. An external consultant can be hired for a Due diligence fee to make the process more objective

Here are the steps that are required for a detailed Due Diligence exercise:

Establishing the purpose of the investment

The investor needs to identify the purpose of the investment to do due diligence on the relevant aspects of the financial assets. For example, an investor wants to invest in a start-up with an aim of explosive growth in the next few years, so that he could exit the investment with massive gains. Or another investor wants to invest in a Real Estate fund specializing in infrastructure to generate a regular flow of income. Establishing the purpose clarifies the areas where the due diligence should be focused on. This leads to the development of the Due Diligence framework

Identifying the focus areas for Due Diligence

Once the purpose is established, investors should identify their focus areas for due diligence accordingly. In the above example say for the start-up the future growth is very important. What are the factors on which the future growth would depend? These are the market in which the start-up operates, its competition, its product, the capability of the team, etc. Similarly, for the Real Estate investment, the quality of underlying assets is important so that the investor could be assured of regular returns. This leads to doing due diligence on the type and quality of investments done by the RE fund, contracts signed, leases, rent rolls, tenants, users, market conditions, and everything else that may have an impact on the RE yield, where the fund operates

Preparing Due Diligence Questionnaires

A questionnaire needs to be prepared for each focus area. The way it works is that one starts with a broad question and set of other supporting questions. The questionnaire is followed by the collection of all the relevant data and documents. The seller provides the due diligence documents through data rooms, that could be physical or virtual. Investors or their representatives go through the details of all the data and documents and ask for clarifications if that is so required. A Due diligence checklist is also prepared to find out all the relevant supporting documents. A Due Diligence Analyst keeps track of the documents in the data room and the actions completed.

Preparing Due Diligence Report

Once the study of all the data and documents is complete, the service provider prepares a due diligence report for the investors. It carries all the details about the investments, outcomes that could reasonably be expected from the investments, and red flags that the investor should be concerned about. Some reports clearly suggest if the investor should go ahead with the investment at all

Magistral Consulting has experience in conducting due diligence for start-ups, private companies, public companies, and funds. It covers all aspects of due diligence done by Private Equity, Venture Capital, Investment Banks, Family Offices, and Fund of Funds. Here are the broad types of Due Diligence

Types of Financial Due Diligence

Various types of Due Diligence performed by Investment Banks, Private Equity, Venture Capital and Family Office firms

Due Diligence of a Company

Due diligence for companies is typically done before investing in or Mergers and Acquisitions of companies. This is also done before buying a business. The areas covered in the process largely depend on the size of the company and the purpose of the investment. While doing due diligence for companies, the following are the areas that should be looked into

Financial Performance-Past and Forecast

This is very critical for bigger companies. As usually the investments are done for returns from stocks, which is directly related to the expected financial performance of the company. It also impacts company valuation and stock price. Past financial performance is pulled out and compared with regulatory filings. Also studied are the market, trends, cyclicity, inventory, and other financial aspects. P&L and balance sheets are dived into to find any outliers. This is compared with peers in the same industry to look for anything that may raise suspicion. Forecast assumptions are checked for validity. Departmental budgets are scrutinized for authenticity and to find improvement potential. Previous audit reports are seen for regularly repeated observations. Usually, for start-ups, this is not a critical factor, as they are still in process of streamlining the revenue sources. Still, for start-ups that are looking to raise funds beyond seed or Series A, it’s imperative to get into the details of financials.

Strategy

Another aspect of companies that need closer careful evaluation is their strategy. The growth rates of the markets, and product categories, it plans to expand into is closely studied. It is checked if the current portfolio of its products and services is the most favorable from cost and growth perspectives. Risks are also evaluated along with the competition of the company. In the case of Start-ups and smaller companies, growth rates, competition and trends are looked into closely to verify the assumptions made while valuing the company

Operations

various other functions of the company are also studied under this like Manufacturing, Procurement, Human Resources, Technology, etc. It is evaluated with a lens of efficiency and cost. This is to evaluate the scope of operational efficiency in case the ownership of the company changes hands. Again this is not so important for smaller or start-up companies.

Team

Due diligence on the team is very important for start-up companies. Their experience, skills, qualifications, and past achievements are looked into to have a comprehensive view of their capabilities and future potential. This factor is not that important in the case of large companies where this exercise is being done for M&A

Product

This is very important for SaaS-based tech start-ups. The product needs to be checked as to where is it in the development stage. If it is fully developed, whether its UI, features, etc. are working properly. If not how much time and effort will go into developing the product. Is there even a chance of whether the team will ever be able to develop the product? For bigger companies, the entire portfolio of the product is studied to find out winners

Customers

In the case of B2B health of the biggest clients is checked out to suggest the sustainability of the market for the company. In the case of the B2C demographic profile and its future changes are analyzed to understand any revenue impact in the future. For SaaS-based tech companies, the nature of customers is understood whether they are free, freemium, or paid and the average ticket price to understand the sustainability of the business in the long run

Due Diligence of Funds

Due diligence of funds is usually done by Fund of Funds, Family Offices, and other investors who are interested in investing in the fund. The process, in this case, is different from the  process followed in case of companies

Activities of Due Diligence

Major differences between due diligence of companies and funds

Here are the items that are looked at while performing due diligence for the funds

Fund Performance

This is true for both Real Estate and Hedge Funds. All the technical parameters related to the fund performance are looked at while making a decision.  This evaluates not only the returns that the fund has generated in the past but also the volatility and the risk taken to produce those returns. Funds’ performance is benchmarked with the indices that carry no investment risks

 

Team

Here the profile of Fund Managers is looked into. Their experience qualification and past performance are looked into while evaluating the team. This is again true for both Hedge Funds and Real Estate funds

 

Investment Focus

The investment focus of the fund is analyzed to see if it is in line with the expectations of the investor. If it is a hedge fund that its markets, stocks, and geography are considered whereas if it is a Real Estate fund then the Real Estate Class and geography are considered for the exercise.

 

Underlying Portfolio

This is slightly more important in the case of Due Diligence of Real Estate funds as compared to Hedge funds as the Hedge Fund portfolio churns more often, whereas the Real Estate portfolio is more or less permanent. The quality of the underlying portfolio is looked at for the potential of generating regular returns. If there are any red flags in any of the properties, the same is highlighted. Real Estate properties and assets are analyzed for price trends, forecasts, rent, value increase, neighborhoods, and future potential of the asset.

Markets

This is more relevant for niche Real Estate funds that are dealing in specialist RE categories like handicap hostels or Self-storage. The potential in the underlying theme is objectively evaluated to find out the potential of returns that could be generated in the future

 

Magistral has experience and capabilities in providing Due Diligence Services to global clients in the space of Private Equity, Venture Capital, Investment Banking, and Family Offices

About Magistral

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modeling, Portfolio Management and Equity Research

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The Author, Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at Prabhash.choudhary@magistralconsutling.com for any queries or business inquiries.