Interview: Duff & Phelps on valuation opportunities from audit change

WHEN Duff & Phelps acquired American Appraisal Associates earlier this year in a deal that made the insolvency specialist the largest provider of valuations expertise in the world, audit might not have appeared a key consideration behind the deal. 

However, the unprecedented reform of the European Union audit market, which has forced large-listed companies to change – or at the very least review – the firms that vet their accounts, has handed Duff & Phelps a golden opportunity to expand its valuation offering, explains the firm’s European head of valuations Yann Magnan (pictured).

The new audit regulations, brought in by EU policymakers last year, include a black-list of prohibited non-audit services, such as tax advice, services linked to financial and investment strategy and, importantly for Duff & Phelps, valuations.

“Valuation is one of the offers that creates the most significant conflicts of interest with audit,” Magnan tells Accountancy Age. “Mandatory rotation is forcing market shares to switch; it creates uncertainty and an environment where clients of these auditors need to think how they deal with valuation.”

While the new audit environment creates “a very good alignment” for Duff & Phelps’ enhanced valuation offering, the starting point was that the general mindset across Europe had already moved towards requiring more transparency and good governance.

“We live in a world where there are more and more requests from regulators for more transparency, good governance and third-party valuation appraisal. With that in mind the American Appraisal transaction is, for us, excellent,” Magnan says.

Comparable footprint

Financial terms of the transaction, which closed during the first quarter of 2015, were not disclosed. Nevertheless, the numbers are sizeable. The transaction adds professionals in more than 50 offices globally and significantly expands Duff & Phelps’ geographic footprint in Europe and Asia. The acquisition increases the firm’s global headcount by 900, with 400 to be based in Europe.

Also included in the transaction is American Appraisal’s Real Estate Advisory Group, a leading real estate adviser with principal operations in Europe.

Magnan says the firm had developed “very nicely” with consistent two digit growth across Europe before acquiring American Appraisal, but that the business felt it could “go faster” and expand its product offering more largely across Europe and provide its services on a larger basis geographically.

“It’s a very good combination but you have to be aware that our client base is very large companies and when they have valuation needs as far as being able to have a footprint which is consistent with the footprint of our client was key,” Magnan explains. “We could have developed that on our own but it would have taken quite some time.”

1+1=3

The deal almost quadruples Duff & Phelps’ staff count within Europe and, as other mergers have shown, there is always the chance that key fee earners will be first out of the door if they don’t agree with the culture of the newly acquired business.

Magnan says there will be “limited attrition” – and then only on admin functions. He doesn’t expect to lose any fee earners as a result of the deal.

“We have very little overlap. It’s a very synergistic transaction. They are present in countries where we have limited presence and are strong on services where we are more limited and vice versa,” he explains.

“We want to make sure 1+1=3, not 2. What’s important is that people get to know each other, connect and understand what their strengths are.”

The transaction is expected to increase Duff & Phelps’ annual revenue by 20%, and although Magnan won’t be drawn on specific financial expectations post merger he is confident the firm will generate more revenues in a “good environment” for valuation services.

“The environment is good, our position is good and the expectation is we can capitalise on that,” he says.