The secondary market for equity stakes in infrastructure assets is at fever pitch, both in the UK and internationally. This is great news for us and our partners, given that the primary market is a bit slower. One key difference is that such secondary acquisitions may involve a tight auction or bidding timetable, often around a month or less – which is of course substantially shorter than those on primary transactions.
This can lead to acquisitions being made through equity only, as there is not enough time to obtain credit approvals from third-party lenders or other providers of debt funding.
In terms of due diligence on the valuation model, until now there have essentially been two options:
- A more limited High Level Review, which Operis can complete in the time permitted but which will not necessarily cover the entire financial model, nor come with an amount of professional liability at final sign-off; or
- A Formal Model Audit, which typically takes 4-5 weeks. This comes with substantial liability levels, but is contingent on a bid timetable extending beyond the 2-3 weeks usually available for a secondary market transaction.
At Operis we have listened to our clients’ requirements and have recognised the need for a middle ground. We have designed a new model review option that gives significant comfort that the valuation is correct to within an acceptable tolerance, by balancing the time available, on the one hand, with the depth of review on the other. We have already successfully deployed this innovative product on a handful of secondary market transactions, to the satisfaction of our clients.
We call it a Due Diligence Review and feel it is ideally suited to the circumstances of a bid- or auction-style transaction in which a complex financial model needs to be reviewed within a relatively short timeframe. The clients in these deals are typically infrastructure investors, and due to the way the transactions are structured they are not necessarily seeking the same degree of model interrogation as a debt provider might be looking for. They nevertheless still require a review that comprehensively checks all elements factored in to the deal’s bid price or asset valuation. With this, Operis offers £100,000 professional liability cover, as reassurance for the clients that we have confidence in our own analysis.
The Due Diligence Review thus brings Operis’s existing expertise to focus on the acquisition price. The financial model brought to us by the client is reviewed to confirm whether it accords with the stated business objectives, and to identify material errors that might affect that valuation. This allows each party to concentrate on the crucial issues rather than on minutiae unlikely to move the needle.
Our Due Diligence Review is therefore specifically designed with private equity clients and similar investors in mind. The valuation calculations will be reviewed in full, focusing on the significant questions, offering some professional liability, and all within the tight bidding timeframe. Any party relying on our Due Diligence Review will thus be comforted that they have tapped into the expertise and experience Operis has accumulated over the years in all areas of project finance transaction support.
At Operis, we are proud to have created this exciting new product for acquisitions and valuation work. It will enable us to continue supporting our clients as their needs change, and as they adapt to a continuously developing infrastructure and financing world.