How AI can be used to improve corporate transparency for private equity
News stories of late have pointed to the need to compile and verify vital data on listed companies. The London Stock Exchange-listed company Lekoil, for example, fell afoul of an alleged fraudulent financing deal, while FTSE 100 firm NMC Health found itself embroiled in an investigation into incorrect shareholder reporting.
For private equity firms, accessing current and precise information about potential targets is a necessity when carrying out due diligence and to inform speculative buyout offers.
With large transaction volumes and complex business operations dictating an environment with increasingly strict regulations, historic due diligence processes such as those used by Companies House are not enough anymore.
Artificial intelligence (AI) can tackle this. Such technology is affecting everything from business operations to consumer behaviour, reducing costs and increasing efficiencies, improving effectiveness and providing competitive advantages.
AI can improve due diligence services using a risk-focused analytic approach which can look at real business performance and identify any inconsistencies. Such technology can be used to deal with the issues with traditional due diligence processes, providing sector and economic data in real time and supplying companies with a broader understanding and more accurate view of the business or sector they are investigating.
The reality of Companies House
M&A is important for all parties involved as capital and jobs are in the firing line. However, data shows that annually, nearly ten percent of all big mergers and acquisitions are not completed. The fallout from any deal cancellation can be extensive, impacting the share price and even the reputation of those involved, and resulting in advisory and termination fee costs, as well as proving a squandering of resources and time.
In order to prevent against such detrimental situations, every possible acquisition needs to be analysed from every angle, with thorough due diligence performed to locate potential risks, confirm assumptions backing up the deal, gather necessary information and plan integration, while, in addition, gaining a more comprehensive knowledge of the business being acquired.
Currently, Companies House holds records of companies as well as their filings, and is utilized by business leaders when considering targets for M&A and evaluating the risks and rewards resulting from a potential acquisition. This information is usually used alongside media databases including both national and specialist press, litigation databases and records on insolvency, civil debt judgements and bankruptcy.
Looking beyond companies house
Companies House holds the UK’s registry of corporate structures as well as data on shareholders, directors, accounts and partners. The UK, though, is one of the countries where it is easiest to create a company. To do so takes fewer than 24 hours and costs just £12. Companies House does not act to verify the information submitted to it and cannot usually amend or remove data on the register.
Many are concerned therefore about the accuracy of Companies House data, since such data is vulnerable to criminal abuse, such as the deliberate entering of false information, and the duplication and misspelling of director names. The anti-corruption campaign group Global Witness investigated PSCs (person of significant control- the person who owns the registered company) in 2018 and found 4,000 of them were listed as being below the age of two, and one had not yet been born.
The absence of checks in place to safeguard against such activity means bad actors can create fake ‘shell companies’ to facilitate the ‘cleaning’ of dirty money. Currently, there are 4.4 million active companies listed on its register, demonstrating that there is a high risk of criminal manipulation which is difficult to identify.
Indeed, the government in May 2019 reacted to ongoing worries about Companies House by opening a consultation on changes to the system, considering providing the register with increased powers to look into companies’ data.
These suggested changes would provide Companies House with increased powers to investigate the businesses on the register. Given the alterations will influence every part of their work, rehauling systems as well as staffing, the reforms are set to take years to implement and will require primary legislation to carry out.
Changing the game with technology
Businesses can make use of technology platforms to enable decision-making, improving the process for identifying and understanding a target company from months to minutes. AI can be utilised to speed up the whole process of an M&A deal, particularly in accounts receivable, real-time data collection, and in-depth research of business targets. AI-powered deal-flow search platforms use huge numbers of data points on UK companies, as well as office profiles, teaming this with SIC code searching with natural language search to provide predictive modelling for future valuations.
Such AI technology can also present a chance for target companies to be M&A ready upfront. Lengthy amounts of time put into manual research can be reduced so that companies can more accurately predict financial growth, find peer analysis and online reputational, financial and combined credit scores, as well as looking at competitor research and analysis.
Meanwhile, technology taking advantage of Baysesian mathematics and Random Forest Modelling can create predictive algorithms to determine future-based EBITDA and DCF valuations.
It’s clear that business leaders must use the technology available in the industry to better prepare themselves for any M&A deal. Both directors and dealmakers need to rely less on Companies House if they are to reduce data discrepancies and take advantage of technologically powered data platforms to process, capture and verify data effectively. Such an approach would improve confidence and reduce the risk in the UK’s deal-making process.