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Warranty and indemnity insurance may remain a staple of European private equity, but are buyers changing course?

By Neil Campbell, Tom D. Evans, Sebastian Pauls, Maximilian Platzer, David J. Walker, Edward Coates, and Catherine Campbell

Warranty and indemnity (W&I) insurance has become an important component of European PE transactions in recent years. However, changing market dynamics and challenging macro conditions (which have cooled deal flow) mean that PE buyers are now more critically evaluating the merits of W&I insurance. The Eighth edition of the Latham & Watkins Private Equity Market Study indicates that the overall uptake of W&I insurance is beginning to plateau, having increased significantly between 2016 and 2019. From a high of 35%, overall usage of W&I insurance in European deals has dropped in the past two consecutive years.

As W&I insurance has matured and PE buyers have become more experienced consumers of the insurance (and of low or nominal liability caps for warranties), the emerging picture is one of a product with a nuanced value. Increasingly, deal-specific characteristics, structures, and issues are playing a role in the demand for and success of W&I insurance, including appetite for stapled policies.

For the retail and consumer product sector, the high yield market will likely remain an attractive source of capital.  

By Roberto L. Reyes Gaskin and Laurie Tomassian

The retail and consumer products sector has been deeply impacted by the COVID-19 pandemic, both due to physical constraints on brick-and-mortar stores and supply chains, and acceleration of existing trends favoring online purchasing and e-commerce. COVID-19 has reinforced the need to adapt to  existing disruptions relating to how AI and data analytics can be deployed in the sector, advances in logistics, and the shift toward more engaged and responsible consumption.

While the long-terms effects of COVID-19 against the backdrop of an already shifting sector are still uncertain, it is clear that many retailers are under pressure: some have commenced restructuring, while others are facing a tougher liquidity environment. All retailers will likely need to further accelerate their omni-channel activity and adapt business models to new retail conditions. Economic conditions may also encourage consolidation (either in the context of restructuring or otherwise) or take-private activity. A high yield issuance may be an option to raise funds to support acquisitions, capital projects, or refinancing of indebtedness.

Negotiating market price, fund economics, management and other investors, documents, and approvals are key to leveraging fund-to-fund transfers.

By Nick Benson, Tom Evans, Huw Thomas, David Walker, Katie Peek, and Catherine Campbell

Following significant fundraising activity, sponsors have substantial capital at their disposal. However, in Europe, there were 564 deals worth US$72.8 billion in the first half of 2019, the lowest volume since the first six months of 2009. Amid the struggle for high-quality transactions, more sponsors are focusing on existing assets, and utilising fund-to-fund transfers to retain prized portfolio investments. Multiple buyout firms have pursued fund-to-fund transfers so far this year — but achieving a deal that balances the interests of those involved can bring challenges. Further, as fund-to-fund transfers become more common, parties are likely to focus more closely on their rights in a potential fund-to-fund transfer scenario.

As management terms converge, deal teams must still navigate cross-border differences in ratchets, put and call options, and management warranties.

By Alexander Benedetti, Tom Evans, David Walker, Neil Campbell, Catherine Campbell, and Eric Loubet

French and UK private equity firms are increasingly looking across the Channel for attractive buyout opportunities. Cross-border transactions involving French and UK sponsors have grown steadily since the global financial crisis, with an uptick in activity in recent years. According to PitchBook, French sponsors bought 33 UK-headquartered companies last year, the highest volume at any point in the past decade. Meanwhile, UK sponsors acquired 56 French-headquartered companies in 2018, up from 34 companies 10 years ago. The long history between the two nations continues to facilitate a strong level of deal flow.

Given the prevalence of pan-European management advisors and the increased number of cross-border deals, cross-pollination of deal terms is occurring. While we expect management equity terms in France and the UK to continue to converge, specific conditions under local tax regimes mean that there are still key areas of distinction. In our view, sponsors considering a buyout across the Channel must carefully navigate differences in the treatment of management equity terms in each jurisdiction. In a sellers’ market, appealing to management can help to win a deal. However, sponsors should proceed cautiously and avoid a one-size-fits-all approach, taking note of the following key developments.

Adherence to secrecy, pre-announcement preparations, realistic expectations-setting, and strategic plans for taking control are keys to P2P deal success.

By Richard Butterwick, Pierre-Louis Clero, Manuel Deo, Tom D. Evans, Tobias Larisch, David J. Walker, Suneel Basson-Bhatoa, Phillippe Tesson, Connor Cahalane, and Catherine Campbell

The deal market has seen a resurgence in public to private (P2P) transactions — global P2P volumes exceeded €115 billion in 2018, and have already surpassed €88 billion as of September 2019. As PE firms increasingly target complex and ambitious European P2P deals, deal teams need to consider tactics and understand local requirements. In our view, buyout firms can maximise the likelihood of successfully closing a P2P deal by considering these key issues.

Manage Your Information Expectations — Public Diligence Is Different

Public deals can falter over diligence, particularly if information requests are sizeable or require significant management time. Additional diligence will likely be carried out post agreement of headline terms — e.g., review of key legal documents, management presentations, etc. — but this is typically more limited than on a private deal, particularly with respect to time. In the UK, France, and Spain, equal information must be provided to bidders — target boards will be conscious that information shared with a bidder may need to be more widely distributed in due course. In Germany, while bidders do not need to be treated equally, access to information will only be granted by the target if it considers this to be in the best interests of the shareholders and the company. In all cases, buyers need to act quickly, with clear and realistic expectations of the public diligence process, in order to keep the board onside.

By David Berman, Carl Fernandes  Nicola Higgs, Rob Moulton and Charlotte Collins

In our January publication, we highlighted what we were seeing as the top regulatory focus areas for our clients during the year ahead, focusing on wholesale market structures and conduct risk.

In a series of 10 blog posts, we will take a closer look at the key areas highlighted, mapping developments from the first half of 2019, and looking ahead to the remainder of the year.

New law aims to expand the currently limited application of class actions in Italy.

By Antonio Distefano and Isabella Porchia

The Italian Parliament recently introduced a comprehensive reform of the rules governing class actions with Law No. 31 of 12 April 2019 (the Reform). The Reform, which was published in the Official Gazette on 18 April 2019, will exclusively apply to unlawful conducts carried out after it goes into effect on 19 April 2020. In the meantime, the provisions currently in force shall continue to apply.

Federal Ministry of Finance publishes draft tax bill outlining new measures effective 1 January 2020.

By Tobias Klass

The Federal Ministry of Finance has released its first draft tax bill on the contemplated real estate transfer tax (RETT) reform, setting out the general framework to which market participants must conform. German political debate has focused on strengthening German RETT laws for some time. The Conference of the German Ministers of Finance added weight to this political debate in June 2018, requesting that tax department heads of the federal and state ministries of finance transfer the resolution into a draft bill. Consequently, market participants have structured transactions to account for considerable uncertainties as regards RETT consequences.

The proposed draft measures are consistent with those outlined in June 2018, however, for the first time, market participants are gaining more clarity about when the new rules likely will apply. Generally speaking, the new rules will only apply to transactions as of 1 January 2020.

The guidance provides helpful clarity on key regulatory changes impacting life sciences companies in the event of a no-deal Brexit.

By Frances Stocks Allen, Oliver Mobasser, Héctor Armengod, Gail E. Crawford, Christoph W.G. Engeler, Robbie McLaren, and Henrietta J. Ditzen

The UK Medicines and Healthcare products Regulatory Agency (MHRA) has published a significant volume of guidance documents on various aspects of the post-Brexit life sciences regulatory landscape in the UK, including in the event of a no-deal Brexit. The guidance provides helpful clarity to life sciences companies operating in the European Economic Area (EEA) and the UK, which continue to face significant uncertainty about how they will be impacted by Brexit — particularly given the ongoing risk of a no-deal Brexit. (For detailed analysis on how a no-deal Brexit scenario would impact life sciences companies, please see this prior Latham blog post.)

Background

On 29 March 2017, the UK Prime Minister gave the European Council formal notification under Article 50 of the UK’s intention to leave the EU, setting the default withdrawal date for the UK’s withdrawal from the EU to 11 p.m. GMT on 29 March 2019. The UK Prime Minister requested an extension to the original withdrawal date in light of the UK Parliament’s failure to approve the withdrawal agreement agreed between the UK Prime Minister and the European Commission. On 21 March 2019, the European Council approved the UK government’s request, permitting an extension of the Article 50 period until either:

  • 22 May 2019, if the UK Parliament approves the withdrawal agreement by the end of the week commencing 25 March 2019
  • 12 April 2019, if the UK Parliament does not approve the withdrawal agreement by the end of the week commencing 25 March 2019, with this period capable of further extension by agreement between the European Council and the UK government, provided that the European Council expects the UK to indicate “a way forward” prior to 12 April 2019

CONSOB notice 8/2019 details the requirements under the Italian investor compensation scheme applicable to UK banks and investment firms operating in Italy.

By Antonio Coletti and Isabella Porchia

On 29 March 2019, the Italian Securities Commission (CONSOB) issued a notice detailing the terms and requirements applicable to UK banks and investment firms operating in Italy in connection with the Italian compensation scheme (Fondo Nazionale di Garanzia or the Italian ICS) pursuant to Article 8 of the Brexit Law Decree…