Due diligence has always been a more profitable business for the Big Four firms, but margins have been squeezed due to competition and cost increases caused by team grabs. But work is aplenty in an India, which is buzzing with more mergers and acquisitions and PE deals than ever before.
Big Four firm EY’s head of deals, Amit Khandelwal takes a list of top transactions — both private equity (PE) and mergers and acquisitions (M&A) — in India and ticks off almost 70% of the names. That’s the number of deals his due diligence team has been involved in representing either the buyer, seller or an investor at some point of the transaction.
“At this time, my teams are running at full capacity,” says Khandelwal, national director and partner, transaction advisory services, EY. At any point, Khandelwal’s team could have 33-34 partners and more than 475 people involved in multiple diligence assignments ranging from financial to tax to forensic audit to cyber security.
“We have an ecosystem of approximately 350 people working on due diligence engagements. About 180- 200 of these people focus on financial, tax and commercial due diligence work; the core of our practice. Apart from this, we also have a floating workforce of around 120-150 people who we rope in for HR, IT, cyber and forensics due diligence work, based on client requirements,” says Sanjeev Krishan, Khandelwal’s counterpart at rival PWC.
It’s not just Khandelwal and Krishan. Due diligence teams across the Big Four firms — EY, PwC, Deloitte, KPMG — have their hands full. Between them and firms like GT and BDO, there are about 1,300 executives working on the financial, commercial, tax, forensics, IT, environmental and cyber due diligence on companies involved in a strategic or financial transaction.
With high profile deal debacles like Daichi-Ranbaxy and souring of a raft of PE deals like FourceeGA, Subhiksha-ICICI Venture, rise in frauds reported, increasing litigation and heightened risks, investors are flocking to due diligence experts.
An increase in M&A deals and PE investments in India in the background of tax reforms like GST have boosted the demand for due diligence expertise. In 2016-17, M&A deals worth $61.26 billion were struck and private equity (PE) investments touched $15.1 billion. Since multiple parties are present in a deal, the rule of thumb is that due diligence is four times the deal activity.
“Also, the activity increase is on the back of renewed optimism on India and also private equity exits,” says Vikram Hosangady, head of advisory, KPMG India.
The stakes are much higher for investors, both financial and strategic, and therefore, a greater need for detailed information. In the past five years, deal sizes too have become larger and structures more complex.
“Buy-out activity has increased and with the advent of the sovereign wealth funds and the pension funds, cheque sizes have gone up. Also the limited partnerships and the investment committee focus on the due diligence process has gone up significantly,” says Krishan of PwC.
So the due diligence process has extended from traditional sectors like financial, tax and forensics to commercial, HR, IT systems, environment, operational and in some cases even regulatory diligence. They also evaluate investee/target company’s competitive positioning, promoter integrity, management gaps, and potential exit routes.
A large PE fund investments in 2005-2008 period, particularly in the infrastructure/EPC and related core sectors have still not found an exit. One of the key drivers for the due diligence business in recent times has been sell side work — promoters proactively getting diligence done on their companies. Due diligence has always been a more profitable business for the Big Four firms, though the margins have gone down due to competition and cost increases caused by team grabs. Currently, they charge anything between `. 3,000 and `. 6,500 per hour, depending on the nature of work and the complexity of the transaction.
Increasingly, the Big Four teams are trying to capture a bigger part of the deal economy by working on the whole chain — pre, during and post the deal. “It’s a beachhead for incremental work for the firms,” says PwC’s Krishan.