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With the recent UK “Green Day” announcements confirming the government’s support for CCUS, interest in UK CCUS projects is expected to continue to grow. While there are significant opportunities for investors, careful consideration will be needed to navigate a number of industry specific issues to achieve a successful CCUS project.

By Beatrice Lo, JP Sweny, Simon J. Tysoe, Evelyne Girio, James Richards, and Alexander Leighton

As governments and businesses around the world have committed to decarbonisation and achieving net zero by 2050, there has been growing activity in the development of, and investment in, carbon capture, usage and storage (CCUS) technologies. As the UK has one of the greatest carbon dioxide storage potentials of any country in the world (the UK Continental Shelf in the North Sea, accounting for approximately 85% of Europe’s carbon dioxide storage potential and able to safely store 78 billion tonnes), CCUS is a key focus for the government’s decarbonisation ambitions.

Call for evidence on regulatory cooperation marks the first phase of the planned review.

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

The Chancellor announced in the Spring Statement that HM Treasury would undertake the Financial Services Future Regulatory Framework Review — examining the long-term effectiveness of the UK regulatory regime and considering where change might be necessary, particularly in light of Brexit.

The Review will take stock of the overall approach to regulating the UK financial services sector, including how the regulatory framework may need to adapt in the future. The Review will seek to address the following four key challenges:

European regulators’ openness to PE investors is presenting attractive banking sector opportunities, but such opportunities require careful regulatory planning and local issue navigation.

By Carl Fernandes, Hans-Jürgen Luett, David Walker, Tom Evans, and Catherine Campbell

Ten years ago, a PE investment in a European bank would have been a rare occurrence. However, more recently, PE firms have deployed capital in the banking sector, encouraged by changing regulatory perceptions of PE bidders. Apollo, together with parallel investors, acquired the former German subsidiary of KBC Bank NV, which since then has completed several add-on acquisitions, kicking off a series of German bank deals. PE firms including Cerberus, JC Flowers, and Blackstone have also completed bank buyouts, as European regulators become more open to financial sponsors — a trend we see continuing in 2019.

What Is Driving European Bank Transactions?

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Disposal requests from the European Commission — as a consequence of breaching subsidy regulations — and regulatory reform have produced deal opportunities. The emergence of new growth markets has drawn the interest of PE, underlined by Blackstone’s €1 billion deal for Baltic lender Luminor. New technology and digital products have also attracted interest, as demonstrated by Cerberus’ acquisition of French consumer business GE Money Bank. Further, control of non-performing loans has meant less unpredictable downside risk for acquirers, but potential upside through enhanced operational efficiency (e.g., adopting FinTech) and exploiting scalability (e.g., through consolidation). As ever, distressed situations also present opportunities.

The PSR will not review the fees and rules set by Visa and Mastercard, but will look at the practice of bundling, and will examine effects on innovation in card-acquiring services.

By Brett Carr, Stuart Davis, and Christian McDermott

Following the publication of its Draft Terms of Reference in July 2018, the PSR has now listened to market feedback and has issued its Final Terms of Reference, marking the launch of its review into whether competition in the supply of card-acquiring services is working well for merchants and consumers.

Card-acquiring services allow merchants to accept payment for goods and services via debit, credit, charge, and prepaid cards. In order to benefit from card-acquiring services, merchants must enter contracts with so-called “merchant acquirers”. Card-acquiring services are often bundled with other services, referred to by the PSR as “card acceptance products” — these include physical card readers (also known as point-of-sale (POS) terminals) and payment gateways (the e-commerce equivalent of POS terminals).

The Final Terms of Reference follow a consultation period on the Draft Terms of Reference, the details of which are covered in Latham’s previous blog post.

Deal making is likely to surge as companies seek funding and private equity firms scour the market for buyout opportunities.

By Andrea Novarese and Cataldo Piccarreta

Italy is poised to help steer automotive deal activity in the final weeks of what has been another bumper year for the industry. According to PwC, global automotive deals reached US$59.3 billion in the first three quarters of 2018 — marking the highest year-to-date value in a decade. As the end of 2018 approaches, automotive deal value is on course to race past previous years at a promising time for sector consolidation and innovation. In particular, private equity firms are on track to play a crucial role in driving deals in the country as Italian businesses seek external investment.

A combination of factors is causing Italy’s automotive companies to increasingly turn to PE funding. For starters, Italy’s autonomous driving development is moving at the wrong speed. According to Roland Berger in Automotive Disruption Radar #4 (2018), Italy ranks 13th among European countries for electric vehicle public charging infrastructure.

In addition, Italy’s automotive industry is highly fragmented and mostly family-owned, which will likely lead to increased demand for investment from financial sponsors. The Italian auto market is currently dominated by small and medium-sized enterprises (SMEs), many of which will require significant additional capital to develop next-generation products. An increase in deal making is probable as companies seek funding and PE firms scour the market for buyout opportunities.

By Beatrice Lo and Heeran Caselton

The Expert Finance Working Group on Small Nuclear Reactors (EFWG), an independent group convened in January 2018 by the Department for Business, Energy & Industrial Strategy, recently published its report with recommendations for a market framework to enable the development of small nuclear projects in the UK with private financing and investment. The report follows the publication of the UK government’s Nuclear Sector Deal (see Latham’s related blog post).

The EFWG report considered small nuclear projects ranging from micro-generation projects through to 600 MW reactors. In contrast to “megaprojects”, such as Hinkley Point C, which is estimated to cost almost £20 billion, the costs of small nuclear projects typically range from £100 million to £2.5 billion. Small nuclear projects can benefit from lower capital costs and quicker build times through modular construction and factory build (as opposed to on-site build) and are generally less complex than a GW nuclear project. These factors render a number of the risks more manageable, and the lower costs involved make the investment required for a small nuclear project within the range of a greater number of market participants (compared to larger projects).

Although the EFWG report focuses on small-scale nuclear new build projects, a number of the considerations and proposals may also be relevant for conventional large-scale nuclear power projects.

By Andrew Moyle and Stuart Davis

Growth in applications for blockchain and tokenisation, combined with an increasing number of initial coin offerings (ICOs), mean that buyout firms should note developments in this sector.

Why Should PE Be Interested in Blockchain?

A shared blockchain ledger could drive a single interface between a PE fund and its investors, increasing transparency and efficiency, providing real-time updates for LPs on investments, and enhanced investment analytics. Blockchain technology could also be used to automate fund administration — traditionally a manual and time intensive process. However, back- and middle office process at PE houses are typically low volume, low margin activities, in our view limiting any cost and efficiency savings for a PE fund. Furthermore, investors and regulators will scrutinize any blockchain solution and the operational risks inherent in new technology implementation.

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A more interesting development for PE is the trend towards tokenisation of financial assets. Tokenisation refers to the manufacture, issuance, storage, and transfer of digital assets on a blockchain infrastructure. Digital assets can take any form, e.g., shares or bonds, profit participation rights, fund interests, or a hybrid instrument that automatically converts from one instrument to another on the occurrence of a pre-defined trigger.

Real estate investors with their corporate seat and management outside of Germany may be subject to German taxation on capital gains from share deals. Non-resident individuals (investing directly or through partnerships or funds) will primarily be affected.

By Tobias Klass and Verena Seevers

According to a German draft tax bill, the sale of shares by foreign-based shareholders of foreign-based companies primarily holding real estate in Germany will trigger a new capital gains exit tax as of 1 January 2019. This change may signal a need for alternative exit strategies.

No-PE Structures

In classic No-PE structures (i.e. a structure avoiding a permanent establishment in Germany), foreign-based companies investing in German real estate are subject to German corporate income tax (at a rate of 15.8%) with respect to the company’s rental income and sale proceeds in case of asset sales of German real estate. Neither rental income nor capital gains are subject to German trade tax (generally ranging from 7-17%) if neither a company’s corporate seat nor permanent establishment is situated in Germany.

Share deal exits from No-PE structures are currently not taxable in Germany, i.e., capital gains from share deals with the target being a foreign-based real estate company (for example a Luxembourg S.à.r.l with non-German based shareholders) are not subject to German corporate income or trade tax. The draft bill aims to change that from January, 1, 2019.

The PSR is to consider whether there is effective competition in the market and makes clear that further reviews of the payments ecosystem could be triggered by its findings

By Brett Carr, Stuart Davis and Christian McDermott

The Payment Systems Regulator (PSR) has issued Draft Terms of Reference for a market review into the supply of card-acquiring services.

The PSR will use its powers under the Financial Services (Banking Reform) Act 2013 to carry out the market review in line with its statutory competition, innovation and service user objectives.

Effective competition in the payments market is a focus of the PSR, and this review follows shortly after dawn raids reported by the PSR in February 2018 as part of its first action under the Competition Act 1998.

Highlights

  • The PSR is taking these steps to investigate concerns that savings from the interchange fee cap are not being passed on to merchants, there is a lack of transparency around the fees paid by merchants to accept card payments and there are barriers to the substitution of acquirer service providers, which all point to competition not working well in the card-acquiring market.
  • A range of actions is open to the PSR, which could see it give directions to the market and its participants, make proposals to the FCA or make a market investigation reference to the CMA.

The FCA has recently announced that it will begin a review of how firms have implemented the unbundling rules “within weeks”.

By Beatrice Lo and Jonathan Ritson-Candler

At its recent asset management conference, the FCA announced that it will imminently launch a review of how asset managers have implemented the new MiFID II obligation to pay for the research they receive from sell-side firms separately from execution costs (the so-called “unbundling rules”). This is the first FCA-initiated MiFID II review, and comes only six months after the implementation of MiFID II. This is indicative of the regulator’s focus in this area.

The unbundling rules, as part of MiFID II, came into effect on 3 January 2018. The rules represent one of the most significant implementation challenges for the industry given that previously, research had not been separately priced and the new rules are silent on how sell-side firms should negotiate and price their research services (and what buy-side firms could accept). This meant that firms were still developing their pricing models and were still engaged in negotiations post the 3 January 2018 deadline. In recognition of this, towards the end of 2017, the FCA and ESMA permitted “trial periods”. During these periods, sell-side firms can provide, and buy-side firms can receive, free research for a maximum of three months (within any 12 month period). The regulator is keen not only to ensure that firms are compliant with the new rules, but also to understand the broader impact of the unbundling rules on the market.