CDD budget

Hi all,
I work with a small firm that does a bunch of CDD work in a specific industry (we’re quite specialised and know the industry well). Wondering how your firm thinks about CDD budget (eg % acquisition cost, % AUM pa, highly dependent on situation)? We're trying to figure out where in the market (AUM) we want to be. Understand this is pretty variable (internal vs external, varying willingness to spend) but would love some data points.
Thanks

 

Thanks, I suppose what I wonder is how internally you think about willingness to pay for external CDD, how much is clearly ‘too much’ to pay on a given deal? I understand this will be variable.

 
Most Helpful

I'm with a large cap buyout firm ($15B+ latest fund). We have an MBB team on retainer, costing us 15%-20% less than standard rates. For multiple concurrent projects, we gather quotes from all MBB firms, usually with an informal bake-off/RFP.

We operate on a fixed-rate basis for each three-week CDD engagement, the cost ($350K-$600K) depending on the team size, capacity, and negotiation. Typically, if the team size is standard and capacity is available, costs hover between $400K-$500K.

Pricing isn’t linked AUM or deal size. The market rate for large cap CDD projects remains consistent on a weekly basis.

 

Work at a shop that has two funds (one $10b+ large cap, and another smaller fund) and the way we think about it is a combination of deal probability of success and deal size/capital gain potential. We don’t bat an eye at spending up to $1m on CDD for a high likelihood/high returns large cap deal but would be hesitant to spend anything at all on a low probability $100m acquisition. Hope that helps

 

Thanks this is very helpful. Follow up - for the smaller say $100m deal, what if it were high probability? What’s max you’d pay? I presume at some point it just becomes too material vs size of deal

 

Another angle, and this might just be a quirk of APAC PE, but the rule I've seen is 1-1.5% of total equity cheque, or max 1% of estimated EV/capex value if unsure for total DD budget, of which CDD typically takes up 20-30%. So ~0.2% of total acquisition cost if you wanna be aggressive on pricing.

Just adding in there even though this may not be relevant to your geography, I noticed you did ask about % of deal size benchmarks and that is how I've seen it done here in APAC (former DD consultant, my previous shop did it this way and this is how my current fund thinks about the DD budget too.)

Oh and of course it's not linear, for very small or large deal sizes the % will be higher/lower respectively.

 

Thanks! Any read on what this looks like at smaller end for APAC? Eg for smaller funds doing eg 50-100m cheque, what would they spend? What about 200-300m cheque?

Much appreciated

 

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