By Claire Ferris-Lay
'Big four' accountancy boss explains the growth prospects for his company
KPMG’s Michael Andrew is the only boss of the ‘big four’ accountancy giants to be based in Asia. In an exclusive interview, he explains the growth prospects for his company.
Just seven days after the struggling UK retailer La Senza appointed administrators KMPG to help rescue it from bankruptcy, the Kuwait-based retailer Alshaya swooped in and acquired 60 stores and rescued over 1,000 jobs. As the euro zone crisis continues to deepen, Michael Andrew, chairman of accounting major KPMG International, is convinced that other GCC-based investors are likely to follow Alshaya’s suit.
“We’re seeing huge appetite [for Western assets]. I’ve had a number of Gulf investors come through my office looking at putting together funds to soak up real estate assets in certain countries,” he tells Arabian Business.
“This is one of those unique buying opportunities that come up every 30 years in the cycle and those that have got the capital and the capacity to do that are going to be well-placed,” he says, adding hotels and properties owned by struggling banks in New York, London, Paris and Frankfurt are likely to provide the best investment opportunities over a medium to long term period.
Eastern investment in Western markets is a prime example of what Andrew, who took over the reins of the auditing giant in May 2011, describes as the new trade flows emerging in the wake of the economic downturn. As the only chairman of the peer club known as the ‘big four’ — PricewaterhouseCoopers, Deloitte and Ernst & Young — to be based in Asia, he is keen to stress the growing importance of markets outside of the US and Europe, not only for KPMG but also the global economy.
“We are seeing China manage its landing relatively well, and I think with the new leadership coming into China and starting to be active in the second half of this year, that will add significantly to not only investment flows but also the fiscal stimulus of the domestic economy,” he explains.
“We are seeing very significant trade flows between India and Africa, Korea and China. Japan [is] diversifying its risk after the tsunami out into Asian countries so there are a whole lot of new investment patterns that are emerging and not relying on Europe and quite unaffected by what is actually in Europe,” he adds.
Andrew’s decision to base himself in Asia would have come as little surprise to those that have followed his career. The Australian’s 27-year KPMG career started in Eastern Europe before he shifted his focus to the Asia-Pacific, first writing the firm’s strategy for the region before overseeing both its Asia-Pacific tax business and its Australia’s tax practice.
The changing trade flows that Andrew stresses will, of course, mean increased demand for KPMG and its rival’s services in those rapidly growing regions. All four accountants benefited from increased demand for advice on cost cutting, acquisitions and new technology from companies recovering from the global recession last year, which is now an area of business that is growing much faster than its more traditional auditing services.
London-based KPMG in December said its 2011 revenues had increased 10.1 percent to $22.7bn as it grew its business across all markets. The firm’s auditing revenue grew 5.8 percent compared to a 29 percent growth for its management consulting practice, which has become on a combined basis, a $2bn business in six years. KPMG’s rivals all reported strong revenue growth last year with Ernst & Young reporting $22.9bn, Deloitte $28.8bn and PwC $29.2bn amid increased demand.
While Andrew admits a similar performance in 2012 may be difficult, he remains optimistic about achieving it in emerging markets such as the Middle East. “We did ten percent last year, which was pretty phenomenal, so I think we’ll be stretching it to do it this year but we’ll try,” he says.
“It’s going to be in the emerging and developing markets in particular where we should be consistently doing more than ten percent. Then it’s about picking those products and opportunities where the growth rates will be above that. We see infrastructure, energy, government and financial services [opportunities] happening around the world. Healthcare we also see as a very significant sector for us.”
KPMG, which generated 7.7 percent of its global revenues from the Middle East, Africa and India last year, plans to hire “hundreds” of staff in the region over the next two to three years as it looks to grow its Middle East business. The firm is currently setting up an office in Iraq and is also eyeing Afghanistan, Palestine and Libya.
“We are opening up in Iraq at the moment, we are looking at expanding in Libya and potentially Palestine so all of those are demonstrating what we see as emerging potential markets for us. Particularly as a reconstruction effort is happening — the World Bank support with new infrastructure requirements [means] some of our big energy companies in particular want to get into those marketplaces for the first time,” he says.
Recruiting specialists to take on roles in those countries is proving somewhat challenging, admits Andrew. “You can’t put an ad and say, ‘go to Iraq’, you really want to have someone that wants to go to for the right reasons and actually wants to be there on the ground and prepared to take on those risks of frontier sort of operations,” he says.
“It is difficult but you generally find that expatriates around the world, or people who have had family or have assets still in Iraq who are really keen to get back there for a loyalty, nationalism point of view and contribute to the resurgence of the economy so we are not finding that difficult to find people for Iraq. Afghanistan might be more challenging,” he laughs.
Andrew not only sees a rise in demand for KPMG’s M&A services in the region but increasingly its advisory services from both regional governments and family-owned conglomerates. “Traditionally [the Middle East] has been a very strong audit base but we are now starting to see strong demand for our advisory skills, particularly in the government infrastructure sector,” he explains.
“It is Gulf governments and it is also some of our multinational clients who are saying ‘how can I actually operate in this region? Can you give me some market advice in terms of market entry, what are the opportunities and can you introduce me to a joint venture partner.’”
“This is such a regional hub, particularly when you’ve got markets like India, Africa, opening up. Dubai is a very natural port for that so we are seeing a lot of our large customers look at their regional entrance strategies into these marketplaces and how they can actually use Dubai and the lower Gulf,” he adds.
Middle East companies looking to IPO and list their shares on local bourses might have declined significantly in the wake of the economic downturn (in May last year they dropped to their lowest in five years, according to data from Ernst & Young) and still look grim for the year ahead but a growing number of family-owned businesses are turning to the auditor to help introduce best businesses practices, says Andrew. “It’s a generation change… they are more open to new ideas and some of our more sophisticated thinking about business efficiency; cost reduction, how to cut your capital,” he explains.
“There is no doubt that with the economic downturn, people are going back to basics, they want to be much more efficient in their organisation, try and diversify their risk, look for new revenues and new markets. Those types of companies that we are talking to are quite entrepreneurial and quite agile so they are more prepared to back some of those ideas than some more stogy multinational type company.”
Andrew’s optimism stops short when he turns to the subject of the euro zone crisis, which has still yet to convince global markets and leaders it has reached a deal on economic reforms. “Things are going to be very tough for the next six months,” says Andrew. “They are starting to deal with their debts, they are divesting non-core assets, and going back to basic so all those things will restore confidence but it is going to take a while for those things to work through.”
“At the same time you now have governments trying to introduce significant austerity measures [and] restructure their economy. Some of those will be acceptable and will be adopted by the populace but others will be strongly resistant and the real question is how this will hold together as a zone and I think they’ll be a few casualties along the way,” he adds.
“We just can’t have complete austerity and complete deleveraging and solve the problem in the next twelve months but we have to show the world there is a plan. I think by the time we get to June/May this year a clear plan will emerge and those that are on track with the plan will start to have the confidence in capital markets restored.”
Andrew’s optimism for emerging economies coupled with a hint of skepticism over Europe, gives him all the more reason to be based in Asia.