Surge in due diligence activity brings flood of business to big four
July, 24th 2017
Due diligence has always been a more profitable business for the Big Four and work is aplenty in an India buzzing with more mergers and acquisitions (M&As) and private equity (PE) deals than ever before.
EY, PwC, Deloitte and KPMG have their hands full. Between them and firms such as Grant Thornton and BDO India, there are about 1,300 executives working on the financial, commercial, tax, forensics, IT, environmental and cyber security due diligence on companies involved in a strategic or financial transaction.
Amit Khandelwal, national director & partner, transaction advisory services, EY, listed top transactions — PE and M&As — in India and ticked almost 70 per cent of it. That’s the number of deals his due diligence team has been involved in, representing buyer, seller or an investor at some point of the transaction. "My teams are running at full capacity," he said. At any point, Khandelwal’s team could have 33-34 partners and more than 4 75 others involved in multiple diligence assignments.
Sanjeev Krishan, leader, PwC, said, "We have an ecosystem of approximately 350 working on due diligence engagements. About 180-200 of them focus on financial, tax and commercial due diligence — the core of our practice. We also have a floating workforce of 120-150 whom we rope in for human resources, IT, cyber and forensics due diligence work, based on client requirements."
CONDUCIVE ENVIRONMENT Since multiple parties are involved in a deal, the rule of thumb is that due diligence is four times the deal activity. With high profile debacles of the likes of Daiichi-Ranbaxy and souring of a raft of PE deals such as Fourcee-GA and Subhiksha-ICICI Venture, along with a rise in fraud, litigation and risks, investors are flocking to the experts.
An increase in M&As and PE investments in India after tax reforms — the latest being start of the goods and service tax regime — have boosted demand for due diligence. In 2016-17, $61.26 billion of M&As took place and PE investments touched $15.1billion. "Also... there is renewed optimism on India and PE exits," said Vikram Hosangady, head of advisory, KPMG India.
EXPANDING SCOPE The stakes are much higher for investors, both financial and strategic, and thus there is a greater need for detailed information. In the past five years, deal sizes too have grown and structures become complex. "Buyout activity has increased and with the advent of sovereign wealth funds and pension funds, cheque sizes have gone up. Also, limited partnership and investment committee focus on due diligence has gone up significantly," says Krishan.
The process has extended from traditional sectors of financial,
tax and forensics to commercial, HR, IT, environment, operational and in some cases even regulatory diligence. The investee or target company’s competitive positioning, promoter integrity, management gaps and potential exit routes are also evaluated.
A large number of PE fund investments during 2005-08, particularly in the infrastructure, EPC and related core sectors, have still not found an exit. One of the key drivers in recent times has been sell side work — promoters proactively getting diligence done on their companies.
Margins, though, are down on the back of competition and higher expenditure due to team grabs. Currently, these companies charge between Rs 3,000 and Rs 6,500 per hour, depending on the nature and and complexity of work.