Different factors determine the speed of diligence in different markets

May 19, 2022 | Case Study

Different factors determine the speed of diligence in different markets

Michel Lowy, Co-founder and CEO

SC Lowy is a Hong Kong headquartered, privately owned global banking and asset management group. SC Lowy’s unique model gives it a valuable perspective on economic change, trends in the fixed income markets and events in various industry sectors.

In just over a decade Hong Kong-based SC Lowy has grown from a small capital markets boutique with a handful of staff to a global banking and asset management group with a US$2bn balance sheet and 250 employees.

A core part of the firm’s growth story so far has been its acquisition drive, comprising two bank acquisitions across two continents in recent years, with a third potentially in its sights. Where this time SC Lowy is scouting for opportunities in India and China, the two previous acquisitions were in countries just as different to each other – South Korea and Italy.

Investing time to know a business is a must

For Michel Lowy, the co-founder and CEO of SC Lowy, the most important aspect when making an overseas acquisition, irrespective of whether it is in Asia Pacific, Europe or anywhere else, is being as familiar as possible with the target business and the country it operates in.

While getting sufficiently comfortable can be difficult for acquirers in some markets, it wasn’t an issue for SC Lowy in acquiring Shinmin Mutual Savings Bank in 2013, and Italian regional lender, Credito di Romagna, in 2018. This was partly due to Soo Cheon Lee, SC Lowy’s co-founder and chief investment officer, being a Korean national who had been doing business with Lowy in South Korea for 20 years. The pair of them also have in-depth knowledge of the European banking sector from a decade as investment bankers at Deutsche Bank.

The devil is (always) in the details

Such experience, augmented by the collective experience of their deal team, can be invaluable. Running proper due diligence, however, is critical.

“This was key for us,” says Lowy of the SMSB deal. “We conducted very granular analysis because we needed to go through the bank’s loans line-by-line in order to make an assessment about how much equity would be needed to recapitalize the bank.” He says while this process lasted around three months and revealed that they needed to put in twice as much equity as the regulator had envisaged, they had also gained a complete picture of what it would take to turn the bank around. Lowy says his team’s hands-on approach to due diligence was key in fully understanding SMSB, and Credito di Romagna more recently. For that transaction, however, the process took about six months and revealed a number of challenges, illustrating how the length of due diligence can vary considerably due to the specific situation and market.

“The bank had been put under special administration by the Bank of Italy, which had appointed a new board,” says Lowy. “When we began the diligence, it became clear that the quality of the loan books was poorer than we first thought, and the management information was not as robust.” Asked to what extent technology helped the due diligence process on either deal, Lowy says: “Technology is helpful, but where the process can be handled manually in an efficient manner, it enables a greater understanding.”

He adds: “Technology is helpful in terms of data analysis and can accelerate certain aspects, but the most important factor is to create a robust infrastructure. The cloud offers exciting possibilities, but it is not always a safe environment. There is an arbitrage between security and efficiency.”