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By Catherine Drinnan and Shaun Thompson

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This year has seen a significant number of business failures, particularly on the high street, as businesses have struggled in the face of market fragility and Brexit uncertainty. When a UK portfolio company is underperforming, the presence of a defined benefit pension (DB) plan with a large deficit can be a significant problem. Companies with large pension deficits require contributions that affect cash flow and make exiting more difficult when the time comes to sell.

If a business slips into distressed territory, however, there are mechanisms whereby a company can divest itself of a DB scheme. As companies respond to Brexit and challenging conditions in some sectors, we believe that 2019 will see more of these types of arrangements. In our view, PE deal teams should consider how to respond if portfolio companies are at risk. While the mechanisms can be effective in allowing a company to continue trading (in some form), PE owners should note a number of important factors before deciding to attempt this.

Pressure to put dry powder to work will likely lead to bigger and bolder PE transactions in the year to come.

By Manuel Deó

Spanish private equity (PE) houses are sitting on large piles of dry powder as they scour the Spanish market for investment opportunities, as is the case in much of Europe. According to Pitchbook, total deal value has decreased by 15.3% compared to the same period in 2017.

This dry powder will not simply disappear. The pressure to put that money to work will likely lead to bigger and bolder PE transactions in the year to come, as PE firms take on more ambitious targets across the country. PE firms will need to source more off-market deals and corporate carve-outs in 2019. These transactions will likely be more common in the next few months as PE firms continue to operate in a competitive sellers’ market.

Limited partners will put more pressure on PE firms to generate returns, inevitably leading to more headline-grabbing buyout attempts. The greater capital needs of larger deal sizes likely will fuel a revival of consortium deals, in which two or more sponsors pool their resources as co-investors. An uptick in consortium-led deals can be positive for corporate boards and senior management, because such deals widen the range of possible investor structures, and deepen the pool of accessible capital and expertise to enhance shareholder value.

By Oliver Browne

Although there remains no widely accepted definition of good faith under English law, and English law has committed itself to no overriding principle of good faith, English law has developed piecemeal solutions in response to demonstrated problems of unfairness.

The variety of these solutions, and the pace with which they are being adopted, is increasing. Indeed, the English courts are starting to embrace the idea of good faith, bringing English law more in step with the laws of other developed jurisdictions.

What does good faith mean?

Unfortunately there remains some doubt. Some cases have described the duty to act in good faith as an obligation to observe reasonable commercial standards of fair dealing, others have addressed the notion of acting consistently with the justified expectations of the parties. Judges have also referred to acting within the spirit of the contract and working together / honestly endeavouring to achieve the stated purposes expressly linked to the duty. They have also emphasised the objective nature of the assessment of good faith in a number of cases, however, courts will take into account the context of the situation and relationship between the parties. A breach of an obligation of good faith is often evidenced by an act of bad faith.

By Simon Baskerville, David Berman, Farah O’Brien and Alex Hewett

Corporate accountability has been a key focus for UK legislators and regulators since the credit crisis, as authorities have taken action against corporate failings. In our view, this focus is evolving to emphasise individual accountability. Developments enacted by the Small Business, Enterprise and Employment Act (SBEE) and forthcoming changes to the Senior Managers and Certification Regime (SMCR) both seek to hold individuals to account, increasing the level of personal risk for PE executives.

New Dynamics to Encourage and Incentivise Claims Against Directors of Insolvent Companies

Changes enacted by the SBEE are expected to increase the likelihood of claims against PE executives sitting on portfolio company boards. While government has not sought to change the law on directors’ duties, it has responded to criticism for not formally holding more directors to account, by lowering barriers to individual enforcement action. Liquidators and administrators can now sell claims against directors to any person, including claims for fraudulent and wrongful trading, transactions at an undervalue, and preferences.

By Manu Gayatrinath and Katherine Putnam

Since the 2008 financial crisis, the US Federal Reserve and other central banks in Europe have pumped trillions of dollars into the financial markets. Notwithstanding the amounts injected, a liquidity crunch in 2016 is unavoidable and could have a significant impact on available financing for PE sponsors.

Several regulatory factors point to this liquidity crunch, including new financial regulations that demand higher capital and liquidity requirements from banks, which must hold more cash in reserve.liquidity graphic Basel III, for instance, requires banks to maintain certain liquidity coverage ratios such that they have high-quality liquid assets that cover total expected net cash outflows over 30 days. Similarly, the Board of Governors of the Federal Reserve has brought in significantly tougher liquidity requirements for the larger bank holding companies in the US. In addition, increased enforcement of leveraged lending guidelines means that US banks are no longer as active in the syndicated markets as they once were, and are no longer in a position to hold certain riskweighted assets on their balance sheets.

By Tom Evans

English Premier League football clubs may start to look more attractive for investment following the League’s £5.14 billion live broadcasting deal with Sky and BT. The deal, for three years from the 2016-17 season, marks a 70% increase on the last deal, worth £3 billion.

As with previous deals, the expectation is that a significant portion of the broadcasting rights revenue will be shared with clubs, a portion for participation and another portion dependent on where a club finishes in the League. In addition, the existence of “parachute payments” for clubs relegated from the League is expected to continue, with the potential for those payments to be more generous as a result of the increased broadcasting revenue.

As a result, with a number of Premier League teams rumored to be on the market, PE houses may start to run their slide rules (or HP12Cs) over certain teams. PE sponsors may feel that they can deliver greater success to these teams through their financial rigor and commercial discipline.