Investor Due Diligence

Investor’s Due Diligence, the checklist for individuals – both Natural and Juristic.

With the recent spate of Financial Services Providers who have been in the news for their various transgressions and Ponzi-scheming, it is key for Investors to understand who it is that they are investing with and the way in which that investment may affect their overall portfolio. So for this checklist we will be focusing on how one can do the necessary research and understand their target companies, with an environmentally conscious, socially responsible, governance focused mission and Vision.

First and foremostly, clients need to understand that there are regulatory bodies which are governed by legislation such as the FSR - Financial Sector Regulation Act of 19 of 2017 – which is also known as the Twin Peaks – which sets the guidelines for the founding of the Financial Services Board, The Prudential Authority, and the Ombudsmen of the different service sectors which fall under the ambit of the Financial Advisory and Intermediary Services act.

These bodies were created with the aim of empowering the consumer, protecting the Financial Services sector from individual bad actors, standardizing the licensing of various categories of financial services providers and the process through which the Financial Sector Conduct Authority conducts the registration and authorisation of financial services providers.

The core of the Financial Advisory and Intermediary Services act is three main things:

1. Treating the Customer Fairly and Knowing Your Customer

2. Ensuring that Advisors act with all Due Care and Skill,

3. Ensuring that FSPs have all their Representatives, Intermediaries and Key Individuals registered.

How does the legislation achieve this?

Treating the Customer Fairly is ensured through the training of Financial Service Representatives and Knowing Your Customer ensured through a variety of services, the most widely used of which is PPVerify.

When the implementation of Financial Intelligence Centre Act came into play, it was to protect our Financial System from Terrorists, Criminals and Money Launders who are attempting to manipulate the system for their own purposes. For this reason, the onus fell on Advisors and Intermediaries to confirm the identity of the client – or anyone acting on behalf of the client, confirm their addresses, and obtain proof that the listed account was in the name of the person – Juristic or Natural who is listed as being the account owner.

Once all of that has been observed then only can business be conducted and the person allowed to conclude their transaction.

The next point of import is ensuring that Advisors act with all Due Care and Skill. The Advisor is responsible for the creation of the client’s long-term investment plan and in being responsible for this, they are responsible for the client’s long-term well-being. This means that the client relies upon the Advisor to act according to the code of conduct, ensure that they are treated fairly and finally that they do not compromise the integrity of the industry at large.

The Ombud is the client’s recourse if the advisor has not done what is necessary however to get to the stage where the ombudsman will intervene certain conditions must be met.

The first condition is that the client must follow the internal complaints procedure and that they have escalated the matter in the correct manner.

The second is that the client has tried some form of mediation between themselves and the insurer/service provider to no reasonable resolution.

Finally, the amount that can be brought to the ombudsman cannot exceed R 800 000, so if the client has an issue which requires a R 1 200 000 transaction being solved then the ombudsman will require that the client waive the additional R 400 000 before beginning.

There is one more thing to keep in mind regarding the ombud and that is that the ombud can refuse to get involved with a case.

Ensuring that FSPs have all their Representatives, Intermediaries and Key Individuals registered. The key individuals and the representatives are all individuals who need to be registered with the Financial Services Conduct Authority to ensure that the relevant individuals are correctly qualified, act with honesty and integrity, uphold the standards of the General Code of Conduct – as well as the specific code of conduct for each category - under which all intermediaries and Advisors fall. These individuals are registered on the Financial Services Conduct Authority’s website for the public to be able to investigate the individuals and ensure that they are dealing with the person that they think that they are.

Advisors are also asked to present their disclosure documents to all clients which have their personal details, their date of first appointment and the name of the FSP which they are acting on behalf of or as an employee of. These details are provided so that all prospective clients can perform their own checks, understand the regulatory protections which are in place and finally conclude their business in a safe environment.

Our next issue is how does one score companies when it comes to being environmentally conscious, socially responsible, governance focused?

The most common method for this is the use of carbon foot printing, stakeholder feedback and Corporate Social Responsibility programs and the impact that they have on those who share in the value that the business generates. One such Framework is ESG (Environmental, Social, and Governance) Criteria. The way this is measured is according to a scale on which the Employment Equity, Inclusivity, Risk Management and Compliance Frameworks are all gauged. The other component is based on the Environmental impact that the company has, so for example the amount of carbon which is emitted by the various delivery channels as it is aggregated across the business.

These practices can be assessed long term as the company will need to roll out and prepare their plans for a variety of time periods. These commitments will be outlined in public companies and shared with shareholders as the companies will often, largely, need to fundraise by issuing more equity or alternatively through other long-term instruments such as debentures or private financing through banks.

The Environmental aspect is one which can be quantified based on what the company does to reduce their annual carbon emissions. The best example of this is the corporate leaning towards planting trees; investing in energy mixes which are varied and will help the company with the offsetting of their emissions. Alternatively, the ability to contribute to a variety of different climate first charities is a fantastic way to garner credits as it places the carbon credits on the company while contributing to a good cause and sharing value with other stakeholders.

The final and most important part is the investor, their values, their time-horizon, and their long-term aims. These will ultimately impact where the most ideal places are to put their money. These are not very easy decisions to make so long as their interests are being competed for across many different companies as many hide things in the fine print and it takes a level of understanding to be able to unravel these. Alternatively the

Financial Analysis:

Review financial statements, including balance sheets, income statements, and cash flow statements.

Analyze key financial ratios and performance indicators.

Assess revenue streams, profitability, and potential risks impacting financial stability.

Market and Industry Analysis:

Conduct a thorough analysis of the industry trends and growth prospects.

Evaluate the competitive landscape and market positioning of the companies or sectors in consideration.

Identify potential disruptors and technological advancements impacting the industry.

Management and Leadership:

Assess the competence and experience of the management team.

Evaluate their strategic vision, track record, and alignment with the investor's goals.

Regulatory Compliance and Legal Considerations:

Verify compliance with local and international regulations.

Assess any pending litigations, regulatory issues, or legal risks.

Risk Assessment:

Perform a comprehensive risk assessment, focusing on both market and company-specific risks.

Consider geopolitical risks, economic volatility, and other external factors.

Corporate Governance:

Review corporate governance practices, including board structure and decision-making processes.

Evaluate transparency, ethical standards, and shareholder rights.

Due Diligence on Private Equity Portfolios:

Conduct in-depth analysis of investment targets within the Private Equity portfolios.

Assess the portfolio's diversification, exit strategies, and alignment with ESG goals.

Exit Strategy and Long-term Viability:

Evaluate potential exit opportunities for investments, considering liquidity and market conditions.

Assess the long-term viability of the investments in alignment with the investor's objectives.

Consultation and Expert Advice:

Seek input from financial advisors, legal experts, and ESG specialists.

Consider external perspectives to enhance due diligence efforts.