 "We see funds doing diligence much earlier in deal cycle: Reshmi Khurana")
Which major areas does Kroll specialise in India?
We specialise in three areas. The first is fraud and corruption investigations, including financial investigations, computer forensics and data analytics. The second is investigative due diligence. The third area of focus in India is market entry studies, focusing on political, societal and environmental factors.
What are Kroll's activities in the PE space in India?
Traditionally, PE companies come to Kroll to conduct due diligence on the reputation, background and corporate governance practices of target companies. Occasionally, the insights we provide leads to their stepping away from the potential deal. We also assist PE firms with monitoring their existing investments and have investigated suspected wrongdoing of senior management, vendors or other stakeholders of investee companies. We also work with major limited partners (LPs) globally and increasingly from Asia, on conducting due diligence on fund managers.
Have you seen an increasing demand for due diligence in Indian PE space?
PE firms in India have always appreciated the importance of doing due diligence on the reputation and background of promoters. But in the last two years, we see funds doing such diligence much earlier in the deal cycle. It is viewed as being as important as legal and financial diligence, in terms of potential impact on the deal. Fund managers have told us they can explain to their LPs if an investment goes awry because of business or economic factors, but will find it difficult to explain if there is a problem in the investment due to ethical issues related to the promoter of the investee company. So, despite the challenges facing the industry, especially the competition among PE firms for investment opportunities, funds invest in due diligence on promoters. In fact, given the lack of viable exit options in the industry, fund managers understand that their relationship with promoters is going to be longer than the typical three or four years.
Do LPs do similar checks on Indian general partners (GPs)? What issues are they concerned about?
The LPs want to be aware of any ethical, legal or reputation-related issues that could impact the performance of the fund or the reputation of the LP. We investigate issues ranging from false claims of business associations, employment, academic and professional degrees, to undisclosed business relationships that affect the fund, to reputation about investment and management style of the fund managers and conflicts of interest.
Do you believe that the lack of diligence has caused the recent promoter-investors disputes in India?
PE disputes are probably no more common in India than in other emerging markets. This is a challenging environment for PE funds in India given the large amount of capital still left to be deployed, competition amongst funds for good investment opportunities and lack of viable exit options. In this environment, there can be a misalignment of promotes' and investors' interests. Most commonly, these relate to disagreements over exit options or an ongoing strategy. In these situations it is helpful to know the decision making structure of the promoter group, the key influencers and the reason for the disagreement. This information can be obtained in the pre-investment due diligence and can help fund managers resolve differences via discussions and by revising the original contract. The problem is far more serious when the dispute relates to fraud by the investee company. Less sophisticated fraud can usually be identified in the routine financial diligence. However, if the fraud is complex and pre-meditated, it requires a forensic accounting due diligence exercise along with in-depth investigative inquiries. One can always argue in favour of more pre-investment due diligence, but the approach varies depending on the target company, if any red flags have been previously identified and the cost of the diligence.