Deal closures taking longer due to higher due diligence

Deal closures taking longer due to higher due diligence

Deal closures are taking longer as investors are taking a lot more time in due diligence than before , said top investment bankers.

Control deals typically take six to eight months now as compared to the four to five months’ timeframe that would be taken by investors before the pandemic, Chandresh Ruparel, managing director and India head at Rothschild & Co, a global investment bank, said.

In addition to the traditional accounting, financial, tax and legal diligence, “ghost visits” are being conducted in some cases and forensic style diligence is carried out in other instances,” he said.

Ruparel added that the deal activity that happened during the pre-Covid years was something which was probably not even thought of. “I don’t want to compare that period because it’s it was a lot more ebullient, and a lot of easy money was available. There was a FOMO effect maybe which led to speed-dating and closing,” he said.

Value of deals have already come down. PE deals in the first half of this year have come down by 61% in the country, according to data from Refinitiv.

Sandeep Gogia , managing director at Equirus Capital agrees with Ruparel. He said that there were a lot of deals in the market given the digital transformation wave that was accelerated by the pandemic and due to FOMO, the investors / buyers were moving fast to close the ones relevant for them.

Gogia said they have seen the typical six to eight months deal cycle getting squeezed to four to six months.” However, in the last 12 months, the deals in the market have come down significantly as a result of -buyers / investors taking it slow and looking to preserve cash due to the general market slow-down in the West. Investors are also pushing their investee companies to focus on sustaining the existing cash for a longer period of time,” he said.

He said promoters are also holding off starting a transaction process due to lowering of the valuation multiples due to the market sentiment.

All of these factors lead to elongating the deal cycles for deals currently in the market – mainly due to extended negotiations to reach closer to founder’s expectations, he said, adding:” Currently we see the deal cycles back to the 6-8 month range.”

Given a couple of instances of overly inflated active users and hence financials and so on,. that came to light in the last few months, investors are wanting to be more thorough with the diligence and would like to do additional channel checks to ensure that they fulfil their fiduciary responsibilities before committing monies, “which adds a couple of weeks to the normally four to six week long diligence exercise,” he said.

” However, with the right preparation for the diligence exercise, supported by the investment banker, haven’t generally seen diligences getting unnecessarily extended., ” he said.

In real estate , Shobhit Agarwal, managing director of Anarock Capital, said that a lot of chages have taken place in structures created before and after the pandemic and a lot of changes have taken place after Real Estate (Regulation and Development) Act, 2016 or RERA.

” The number of investors has reduced now. Seller is always under pressure not the buyer. Buyer takes time,” he said.

He said because of changes happend in financial services post IL&FS and in real estate fter RERA, consultants and lawyers got very busy as stress in the system went up.

“Everybody wants to hire the best banker for cleaning the mess which happend during the transition,” he said.

Private equity investors such as Abhishek Sharman, founder and managing director at Carpediem Capital believes that more due deligence is needed in current times because of higher instances of financial mismanagement which will hurt investor confidence and the ability of the industry to access capital. There is also a need for greater oversight post-investment, he added.

He said Carpediem follows five different kinds of diligences before investing in a company and that approach has served us well. “In the early-stage deals, there was probably a greater deal of exuberance and given that companies were turning Unicorns very fast (especially in 2021), investors were being forced to take calls without having adequate time or access to follow a robust process. Some of that is playing out now,” Sharman said.

WHAT’S UPControl deals typically take 6 to 8 months now as compared to 4 to 5 months earlierIn addition to financial, legal diligence, “ghost visits” are being conductedPromoters are also holding off starting a transaction process due to lowering of the valuation multiples