Giving joint venture due diligence its due.
JOINT VENTURE AND M&A due diligence are superficially similar. Both follow the same basic process, starting when a preferred counterparty is identified and confidentiality agreements are signed, and usually concluding just prior to the signing of definitive agreements. Both use similar advisors to investigate similar topics: Accounting firms lead financial due diligence; industry specialty consultancies perform parts of technical and operational due diligence; law firms drive legal and compliance due diligence. And both serve the same core purposes: To confirm that the company is getting what it expects from the counterparty, and to more deeply understand the counterparty’s assets and capabilities to inform transaction choice and key deal terms.
But JV and M&A due diligence deviate in critical ways. A senior dealmaker at a Canadian energy company phrased this perfectly:
When comparing M&A and JV due diligence, I often think of them as the difference between selling your home and moving away … [versus] selling half your home to another family, who will move in with you. With the latter, you are going to pay attention to a lot of different things.
The lack of ultimate control in a joint venture impacts each of the main domains of due diligence (Exhibit 1). Strategic partner due diligence becomes much more important in JVs – adding depth and texture to the initial picture of the counterparty’s strategy and strategic drivers, its appetite for risk and future investments, its history in other joint ventures and with other partners, and its corporate culture and decision-making style. In financial and commercial due diligence, it is more difficult to access a counterparty’s financials, and thus model total venture economics, in a joint venture. JV due diligence also requires evaluating the technical and operational capabilities of the counterparty. But unlike M&A due diligence, it must translate how these capabilities will map to and complement those of the company to optimize a joint venture. Finally, legal and compliance due diligence must look at an expanded range of assets and activities impacting venture performance and risks. For example, in a JV, due diligence needs to investigate assets and activities outside the venture (i.e., those that remain with the partner company) but that could directly impact venture performance or the company’s reputation.
JV due diligence differs in other ways. Because at least half of JV transactions are driven by business units – and not corporate centers – those running the transaction are generally less experienced in due diligence, and have fewer resources to devote to it. This mere fact alone may explain why so few JV transactions have data rooms. What is more, in certain geographies and industries, JVs will target a state-owned company as the partner – a partner type that is almost never present in corporate M&A. When the counterparty is a state-owned company, diligence changes in important ways: The demands of anti-bribery and corruption due diligence become much more intense, and the complexity and data-gathering challenges of evaluating partner capabilities increases exponentially, as does the need to understand cultural differences. 
There are also fundamental differences in purpose and mindset. In M&A, due diligence is largely “confirmatory” – that is, the company is ensuring that it is actually buying what it thinks, and is not assuming any hidden liabilities or risks. After early due diligence is used to inform the overall shape of the transaction, detailed due diligence in M&A tends to be run in parallel to deal structuring and negotiations. In JVs, however, due diligence will be much more “informatory” – that is, the company is seeking to understand what the partner brings and how it thinks, and using this to actively inform the optimal shape of the venture. This difference in mindset came to life recently during the negotiations of a new business JV with an Indian partner, when the General Counsel of our European client asked: “Why do we need to do any due diligence? After all, we’re not buying any assets.”
This touches a broader point: In our experience, due diligence in JVs tends to be pretty strong in cash transactions (i.e., ventures where one partner is contributing cash, and the other partner is contributing assets or a business). But in non-cash transactions (i.e., those where both parties are contributing capabilities, perhaps a few assets, and just a bit of cash), the appetite ...