How do you say Due Diligence in Chinese?

How do you say Due Diligence in Chinese?

Asia is often referred to as the land of opportunity. Indeed, while the continent  offers hope and promise to investors, it remains as critical to perform a thorough due diligence analysis when considering investing in Asia, as in any other economic region in the world. Take note, that several key issues distinguish China from Europe and the US, and that these key issues require a different approach in conducting due diligence than might be employed in other regions.

From our extensive experience, three particular areas of research require special understanding and region-specific expertise in order to effectively acquire the information necessary to make sound investment decisions:

  1. Different methods of accessing information
  2. Different social media networks
  3. Looking beyond online sources

Getting information

Since LinkedIn is not as widespread in China as it is in Europe and the U.S., in order to obtain necessary information, it becomes necessary to identify and establish a relevant contact. A much more challenging next step in the process, is to convince potentially relevant individuals to speak with you. In China, what matters most are personal connections (or guanxi [关系] in Chinese). Guanxi can take on different forms, but in the context of due diligence, there is a good chance that if you lack the right connection, potentially helpful people will simply refuse to talk to you.

In addition, it is vital to understand the culture’s powerful aversion to talking with a stranger. In the West, conducting due diligence is a common practice and people are familiar with the concept. However, in other places, potential interviewees tend to view with suspicion traditional western forms of information gathering. This is why acknowledging, understanding and addressing cultural differences is critical for successfully conducting due diligence research.

Social Networks

When we hear the phrase “social networks,” we immediately think of the usual suspects: Facebook, Twitter and LinkedIn. Since almost everyone in the West subscribes to these social networks, it is easy to forget that many countries have much less exposure to them; and in some cases, access to these websites is actually blocked.

China hides behind the so-called “The Great Firewall of China” where Facebook, Twitter and LinkedIn are almost unknown.  As of today, these networks can be accessed only through a VPN or a proxy server.

The Great Firewall notwithstanding, no vacuum exists in the Chinese social media sphere.  Instead of Facebook, there is RenRen; instead of Twitter the Chinese have Weibo; and instead of LinkedIn there is JingWei and other websites. Even Whatsapp has a sexier Chinese app called WeChat, that is also used as a social platform. In order to effectively mine information from Chinese social networks, one must maintain a strong presence in each of these platforms, and know how to  navigate them effectively.

Looking beyond online sources

It is a well-known fact that the formal, financial reports produced by Chinese companies can show a misleading picture of the actual financial condition of a particular company. Accordingly, while in some cases there may be some justification in not visiting a potential investment target in the US or Europe, in Asia it may be more important for an investor to physically go and see it for himself (or by somebody on his behalf). Is the company really active? How many employees work there? Is the reported unit growth feasible? What do the locals think about it?

 

These are only a few points. If you would like to learn more about our research methodologies in Asia, including how we address issues pertaining to language differences, please contact us at:

asia@ke-la.com

 

And we would like to wish you all a Happy Chinese New Year of the Monkey!

Monkey

Checking all the boxes – pre-IPO-screenings

IPO

An IPO is a milestone in a company’s life-cycle, but in an age of unicorns, it is extremely important for the underwriter handling the IPO to ensure that the investment disclosure is 100% bulletproof.

In recent years we saw a number of spectacular IPOs, like Facebook in 2012 or Alibaba in 2015. While these multibillion-dollar IPOs made the headlines, the majority are much smaller, so when a small company plans to invest several hundred thousands dollars to raise $15-20 million – it is critical to leave no stone unturned.

Carrying out an accurate valuation of a company can be a daunting task for an underwriter, especially if the issuer is a closely held private company offering limited information. The lack of easily accessible information becomes an even bigger challenge when a foreign-based business plans to go public in the US or UK. Issuers operating in Frontier Markets, where corruption is common, face additional challenges, since any violation – whether alleged or proved – of the Foreign Corruption Practice Act (FCPA) might result in a major decline in market value.

For example, assessing risks in Asia is a typical challenge for American underwriters, who advise Chinese companies planning IPOs in the US: Are the revenue and unit growth figures valid? Are the founders and executives known businessmen in good standing?

The advisor will typically want to conduct a corporate governance and board check, based on both Open Source Intelligence (OSINT) research, as well as interviews (HUMINT). KELA conducts such research using its team of ex-IDF analysts and HUMINT operators. Governance check can also clarify who owns, and in practice has control of, a company; this is essential when the issuer is based in a country known for its low corporate standards or heavy government involvement.

While a corporate governance analysis will provide the underwriter with an overview of the current situation, it’s important to examine a company’s past. KELA performs a comprehensive legal due diligence, designed to map a company’s legal history and verify the statements made in the offering, thus avoiding any potential liabilities arising from incomplete or misleading disclosures.

Usually, KELA will perform a wide range of in-depth OSINT and HUMINT research, designed to reveal any problematic information and provide advisors with the required risk assessment ahead of the IPO:

  • Political Affiliations – including donations, membership and any personal
  • Complete social media review, including Chinese, Russian and other social media platforms; search and review of any reference, with an emphasis on negative information, such as alleged fraud.
  • Financial Records – including lesser known or hidden affiliations, business partnerships and ownership, directorships and assets.
  • Civil and criminal litigation, both current and historical.
  • Sanctions and Actions, Watch lists and Blacklists.

All the elements of an intelligence report have a single objective: providing the underwriter with an in-depth assessment of the issuer and exposing any unexpected risks associated with the IPO. The screening process might seem excessive, especially when dealing with small or medium IPO’s; however, the money invested in preliminary research is a small fraction compared to the potential damage to the underwriter.

KELA Israeli Intelligence for Investors

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KELA Israeli Intelligence for Investors

Investors often hire KELA to conduct supplemental research for finding hard to reach information that exists in the public domain, regardless of where they invest in the capital structure. KELA’s proprietary technology and army trained intelligence analysts work to complete the picture with information on investment targets that may not be immediately accessible through traditional research processes.  We provide our clients with actionable intelligence that can help them right size their positions.

It’s important to note that ‘Israeli’ in the name refers to our technology and our talent – read more about our analysts here . While KELA is based in Israel, our reach is global, and clients have hired us for subjects in over 30 different countries and a wide variety of languages.

 

Research Process

Investment firms turn to KELA to help fill gaps in targeted research queries, the results of which are likely to influence their firm’s investment strategy. Typical examples of such queries include corroborating claims of an investment target regarding its product or performance; conducting deep background checks on an investment target management team; conducting custom research for a comprehensive company review towards IPO’s. Though our use cases may vary greatly, our approach is typically extremely targeted.

The process often begins with KELA’s sales team assisting clients in identifying with precision a specific research need. Once a client has articulated its research objective, a senior analyst from KELA’s Tel Aviv office weighs in to help define the scope of the project. The analyst will then take the project and cast a wide net throughout KELA’s open source intelligence resources (OSINT). In addition, the analyst team may apply an overlay of human intelligence (HUMINT) gathering. The final step involves evaluating and processing the intelligence: In this critical stage, analysts connect the dots, creating a coherent picture from the wide range of sources and the volumes of information gathered. The chief analyst then assesses the team’s findings to offer conclusions, provide practical insights and, where appropriate, recommend actions that add value to the information sought by the client.

Through each stage of the process KELA’s analysts rely on in-house technology, developed by KELA’s R&D department, for cataloging sources and details according to relevance, automatically cross referencing information, and homing in on particular sources for geo-specific or segment-specific requirements.

What results is an extremely deep, precisely targeted intelligence report, built from the ground up and fully tailored to the particular needs of each client. In this way, KELA proves an invaluable partner to investment firms seeking that critical, but often elusive, missing piece in its decision-making puzzle.

 

How to Engage KELA

KELA maintains offices in New York and Tel Aviv. Please reach us on sales@ke-la.com  or call our local offices.

A New Kind of Open Source

At KELA we are constantly adding new sources of information to our open source intelligence (OSINT) research, in order to continuously improve the quality of our intelligence gathering process. Typical sources include government databases and paid subscription information websites such as litigation records or educational certificates.

However, as highlighted in a recent Wired magazine article, the amount and depth of information which can nowadays be gathered in the open sources is truly remarkable – including, as in this case, your relative’s DNA samples.

Read this fascinating article at http://www.wired.com/2015/10/familial-dna-evidence-turns-innocent-people-into-crime-suspects/.

For more information, visit us at http://www.ke-la.com.

DNA

KELA’s Intelligence – Our Research Methodology

All of the research we carry out at KELA is project-specific, developed from the ground up by a team of analysts according to the client’s requirements, and offered to that customer alone. We don’t perform any broad market or segment research – only targeted, customized intelligence. In this post we share some of the methods we use conducting our research.

 

Areas of Research

KELA’s Decision-Supporting Research Services are divided into three areas:

Business – KELA offers corporate decision-makers, whose businesses depend on timely and accurate execution, cutting-edge intelligence facilitating critical business decisions regarding competitive analys, market entry, M&A and partnerships, and CXO pre-hire screening.

Investment – KELA caters to the needs of hedge funds and institutional investors by providing supplementary research for current investment strategies, pre-IPO due diligence, private equity research, and corporate governance checks.

Cyber– Businesses must be aware to the threats they face. KELA’s proprietary RaDark Threat Intelligence Console monitors the hard-to-penetrate dark web. It’s designed to operate together with KELA’s External Threat Assessment, providing companies with a comprehensive and up-to-date assessment of their strengths, weaknesses, and risks in the ever-shifting landscape of corporate cyber security.

 

Our Analyst Team

The core of KELA’s research process is our team of analyst – all alumni of IDF Unit 8200, proficient in 17 different languages.

Most intelligence analysts in the Israeli army serve in 8200, which, in addition to being the largest unit in IDF, is responsible for all signal intelligence collection and analysis.

As part of Israel’s compulsory draft system, all recruits undergo a comprehensive evaluation. Those identified as potential candidates for the intelligence division, typically outstanding students who speak foreign languages, undergo 6-12 months of intensive training.

Unlike standard military training, 8200 analysts’ training is conducted in highly equipped classrooms. Candidates spent days polishing their linguistic skills, attend data mining lectures by experts, and experiment with solving old intelligence queries. During this training period, they also learn how to process huge amounts of data from a wide range of data types and sources. This variety requires trainees to develop specific expertise, and thoroughly validate sources before devising an overall assessment.

Upon completion of their training, recruits serve on active duty as intelligence analysts in the IDF. The analysts, usually 20-year-olds at this point, operate in young, creative environments, allowing analysis methods to constantly evolve in a dynamic and innovative way.

These rooms are where the thriving Israeli startup ecosystem starts to develop. Thanks to its fresh, carefully chosen soldiers, 8200 is widely considered as the most inventive intelligence incubator by the Israeli intelligence community.

Following procedures developed by the IDF, KELA believes that effective business and investment intelligence must be collected from a range of sources, and processed using various methodologies. KELA’s approach embraces this diversity, and our process includes proprietary intelligence gathering technologies developed by our R&D team, as well as HUMINT staff conducting personal interviews.