GPs: Increased due diligence a drag on deals

More than half of fund managers say enhanced due diligence is making the investment process considerably longer, according to a recent study.

GPs are taking longer to complete deals as they vet target companies more thoroughly than ever before, a survey from valuation specialists Duff & Phelps found.

More than half (55 percent) of the 75 private equity executive respondents indicated that the median time to complete a transaction from start to finish takes about seven to nine months these days. Recent figures from “Big Four” audit firm EY found that all mergers and acquisitions (including buyouts) took on average 52 days in 2012 compared to 48 days in 2011 and 47 days in 2010.

“The depth and method of due diligence has changed over the last few years,” said a principal from a US-based firm in the Duff & Phelps survey. “Since the recession, every investor wants to ensure they have made the right investment decision by collecting and studying all the important information about the target prior to completing a transaction.”

More than half of US and Canada-based respondents said due diligence is the foremost reason for longer transaction times. A third of Europe and Asia-Pacific-based respondents also said a longer due diligence process as the greatest reason for protracted deal processes.

Aside from taking longer to assess a target’s value through the due diligence process, longer timelines are also a way to make sure that all regulatory hurdles are addressed, the survey said. More than a quarter of respondents (28 percent) think that regulatory and compliance risks are the top two challenges faced by private equity firms. “The regulatory requirements have risen significantly, increasing the complexity of the due diligence process and delaying transactions,” said a Europe-based private equity director in the survey.

Another challenging aspect of today’s dealmaking climate is facing other GPs at the boardroom table, a situation that crops up fairly regularly, researchers in the survey said. Respondents are almost equally split between obtaining a fairness opinion and letting an investment committee decide on the value of the deal. Obtaining a fairness opinion, which evaluates facts compiled about a deal to determine whether the offered price for an acquisition is fair, is a way to mitigate future litigation costs.

“Without a fairness opinion, it gets rather tough to handle transactions that involve funds on opposite sides of the deal and to balance the different opinions of partners and founders,” said a partner at a Europe-based private equity firm.