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Due Diligence From Investor/Financing Perspective

Jolisa M. Dobbs, Brian E. Minyard, Due Diligence in Mining and Oil & Gas Transactions

This paper attempts to identify how some of the differences in structure and expectations for realizing investment returns between debt and equity investments create different diligence models for evaluating investments. We will take two investment models to represent the different classes of investments:

• a syndicated credit agreement, as a proxy for debt investments, and

• the purchase of assets into a newly formed special purpose entity, as a proxy for equity investments.

Given these models, differences among investment structures within these two broad groups (for example, an equity investment consisting of purchasing stock in the company in the market) are not thoroughly covered. We note that there are structures that are hybrids of the two general classes (for example, mezzanine debt investments with equity participations or “kickers”) - these typically involve aspects of both types of investment.

As the requirements and expectations with respect to diligence for debt investments are in flux after the financial crisis, we will attempt to highlight some changes in diligence expectations relevant to practitioners as we discuss the types of diligence conducted in order to provide a brief overview of the current state of the market. It should be noted that the uncertain economic conditions that drove this evolution in expectations have lar